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The Economics of International Trade Agreements

Paper Session

Friday, Jan. 5, 2018 10:15 AM - 12:15 PM

Loews Philadelphia, Lescaze
Hosted By: International Economics and Finance Society
  • Chair: Kamal Saggi, Vanderbilt University

The Economic Structure of International Trade in Services Agreement

Robert W. Staiger
,
Dartmouth College
Alan O. Sykes
,
Stanford University

Abstract

The existing economics literature on international trade agreements focuses on tariff agreements covering trade in goods, and offers an explanation for core features of the GATT. Tariffs play almost no role in services markets, however, and the existing models cannot account for the dramatically different approach to trade liberalization in agreements such as the WTO General Agreement on Trade in Services (GATS). We develop a model through which key features of GATS, including its emphasis on "deep integration" – sector-by-sector negotiations on behind the border policy instruments – can be understood. And we use this model to suggest that there may also be a middle ground for services trade liberalization between the GATS deep-integration approach and the traditional border-policy focused "shallow integration" approach of GATT.

DCBFTs and Trade

Eric W. Bond
,
Vanderbilt University
Robert A. Driskill
,
Vanderbilt University

Abstract

We examine the effects of ‘destination based cash flow tax’ on trade. The implementation of this policy has been referred to as a ‘border tax adjustment’ because it exempts export sales from the tax but does not allow firms to deduct purchases of imported intermediates from the taxable cash flow. The aim of this tax, which would replace the current US corporate tax system, is to remove the incentive of multinational firms to locate part of their operations in low-tax jurisdictions. Under plausible assumptions of a specific-factors model the tax would effectively raise the return to import-competing goods relative to exportables, resulting in a flow of resources out of the exportable sector.

Preferential Trade Agreements and Rules of the Multilateral Trading System

Kamal Saggi
,
Vanderbilt University
Woan Foong Wong
,
University of Oregon
Haris Murat Yildiz
,
Ryerson University

Abstract

Preferential trade agreement (PTA) members have to eliminate internal tariffs with each other but are allowed to discriminate against non-members. This can be in potential conflict with the WTO's overall non-discrimination clause. Using a competing exporters model of endogenous trade agreement formation, we study the central rules that govern PTAs. We find that the free trade agreements' (FTAs) requirement to eliminate internal tariffs increases total welfare when circumstances are such that global free trade is infeasible. However, it also reduces the likelihood of reaching global free trade. We also find that the MFN constraint does not just contribute to the achievement of global free trade but also delivers a welfare-superior outcome when global free trade is not possible. Finally, we show that the MFN constraint complements the PTA rules in achieving global free trade for only FTAs but not customs unions (CUs). However, when global free trade is infeasible, the MFN constraint is welfare improving for both types of PTAs. We conclude that while the likelihood of global free trade within the WTO requirements depends on the nature of PTAs, these requirements are necessarily welfare improving in a tariff-ridden world.

Contesting an International Trade Agreement

Matthew T. Cole
,
California Polytechnic State University
James Lake
,
Southern Methodist University
Ben Zissimos
,
University of Exeter

Abstract

We develop a new theoretical framework of trade agreement (TA) formation, called a `parallel contest', that emphasizes the political fight over TA ratification within countries. TA ratification is inherently uncertain in each country where anti- and pro-trade interest groups contest each other to influence their own governments' ratification decision. Unlike prior literature, the protection embodied in negotiated TA tariffs reflects a balance between the liberalizing force of lobbying and inherently protectionist government preferences. Moreover, new international political externalities emerge that are not internalized by governments that just internalize terms of trade externalities.
JEL Classifications
  • F1 - Trade