Negotiating free trade

We develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once. We show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining, and we identify circumstances in which the grand coalition is the equilibrium outcome, leading to worldwide free trade. A model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection. Global free trade is not achieved when the political-economy motive for protection is sufficiently large. Furthermore, the model generates both “building bloc” and “stumbling bloc” effects of preferential trade agreements. In particular, we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form (a building bloc effect), and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect). The analysis identifies conditions under which each of these outcomes emerges.     

Trade interdependence, the international financial institutions, and the recent evolution of sovereign-debt renegotiations

This paper analyzes the effect of a debtor country’s pattern of trade with commercial creditors’ home countries on the outcome of debt-rescheduling negotiations. The analysis reveals that a debtor country with more market power has greater leverage in a three-way debt-rescheduling negotiation that includes the debtor country, its creditors and the International Financial Institutions (IFIs). The paper also considers the effects of the IFI sovereign-debt policy on the bargaining power of the parties in debt-rescheduling negotiations. Two bargaining frameworks analyzed and compared in the paper represent the negotiation mechanism at different stages of the IFI sovereign-debt policy evolution.     

Do free trade agreements actually increase members' international trade?

For over 40 years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and — in particular — the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: trade policy is not an exogenous variable. We address econometrically the endogeneity of FTAs. Although instrumental-variable and control-function approaches do not adjust for endogeneity well, a panel approach does. Accounting econometrically for the FTA variable's endogeneity yields striking empirical results: the effect of FTAs on trade flows is quintupled. We find that, on average, an FTA approximately doubles two members' bilateral trade after 10 years.     

国际贸易、租金分享和工资水平——基于浙江制造业的实证研究

本文在工资决定的租金分享谈判框架下,利用浙江省2004年的经济普查数据,研究了国际贸易、企业盈利能力对制造业企业工资水平的决定效应。研究发现,资本方和劳动方之间存在明显的租金分享机制,企业盈利能力的增加会导致制造业从业人员收入的提升;尽管出口贸易没能提升企业的盈利能力,但出口贸易可增强劳动方在租金分享中的谈判能力,最终提升工资水平。最后,本文在租金分享谈判框架下讨论了工资差异问题,并得出结论认为,当前的国际贸易模式不会导致工资差异的扩大,但是产业管制政策和外商直接投资有导致工资差异进一步扩大的可能性。     

Issue linkage and issue tie-in in multilateral negotiations

We describe a model of international, multidimensional policy coordination where countries can enter into selective and separate agreements with different partners along different policy dimensions. The model is used to examine the implications of negotiation tie-in — the requirement that agreements must span multiple dimensions of interaction — for the viability of multilateral cooperation when countries are linked by international trade flows and transboundary pollution. We show that, while in some cases negotiation tie-in has either no effect or can make multilateral cooperation more viable, in others a formal tie-in constraint can make an otherwise viable joint multilateral agreement unstable.     

Policy choice: Theory and evidence from commitment via international trade agreements

Why do governments employ inefficient policies when more efficient ones are available for the same purpose? We address this puzzle in the context of redistribution toward special interest groups (SIGs) by focusing on a set of important policies: tariffs and non-tariff barriers (NTBs). In our policy choice model a government can gain by committing to constrain tariffs through international agreements even if this leads to the use of less efficient NTBs; commitment has political value because it improves the bargaining position of a government that is weak relative to domestic SIGs. Using detailed data we find support for several of the model's predictions including: (i) tariff commitments in trade agreements increase the likelihood and restrictiveness of NTBs but not enough to offset the original tariff reductions; (ii) tariff commitments are more likely to be adopted and more stringent when the government is weaker relative to a SIG. Thus, the results can explain the use of inefficient policies for redistribution and suggest that the bargaining motive is an important source of the political value of commitment in international agreements.     

A reappraisal of strategic trade policies with the endogenous mode of competition under vertical structures

This paper examines the endogenous choice of competition mode with strategic export policies in vertically related markets when each upstream firm located in each country determines the terms of the two-part tariff contract by maximizing generalized Nash bargaining. We show that (i) choosing Cournot (Bertrand) competition is the dominant strategy for both downstream firms when goods are substitutes (complements), which leads Pareto superior regardless of the nature of goods under the optimal trade policies; (ii) irrespective of rival’s competition mode, the optimal trade policy is an export subsidy under Cournot competition and an export tax under Bertrand competition; and (iii) trade liberalization may give rise to changes of competition mode and increase of social welfare.     

Strategic trade policy and union-firm bargaining agenda

In this paper, we revisit the issue of the scope of bargaining between duopolistic firms and unions in an open economy with strategic trade policy. It is shown that, in contrast with the case of the absence of export tax/subsidy, a right-to-manage (RTM) arrangement always emerges endogenously as a sub-game perfect Nash equilibrium in agreement between parties. Moreover, such an arrangement may be also Pareto-optimal in both exporting countries in the sense that profits, workers' welfare (provided that union's power is sufficiently high) and social welfare as a whole are higher than the efficient bargaining (EB) arrangement. Moreover, since the government of the country in which there is EB (while in the other country the alternative agenda RTM is used) levies a tax on export, then the conventional result that under quantity competition it is always optimal for exporting countries to subsidise exports may be reversed.     

Endogenous trade policy and lobby formation: an application to the free-rider problem

This paper develops a model in which tariffs are determined through bargaining between a utility maximizing policy maker and an industry lobby. Individual firms only contribute to the lobbying effort if it is in their own self-interest so that both trade policies and lobby formation are endogenous. By introducing bargaining between the industry and the government, the paper provides microfoundations for the tariff-formation function approach taken by many authors in the political economy literature. Applied to the free-rider problem, the model identifies general conditions under which increasing the number of firms in an industry makes cooperation between them more difficult.     

Carbon,Trade Policy and Carbon Free Trade Areas

This paper discusses both the potential contribution that trade policy initiatives can make towards the achievement of significant global carbon emissions reduction and the potential impacts of proposals now circulating for carbon reduction motivated geographical trade arrangements, including carbon‐free trade areas. We first suggest that trade policy is likely to be a relatively minor consideration in climate change containment. The dominant influence on carbon emissions globally for the next several decades will be growth more than trade and its composition, and in turn, the size of trade seemingly matters more than its composition given differences in emission intensity between tradables and non‐tradables. We then note that differences in emissions intensity across countries are larger than across products or sectors and so issues of country discrimination in trade policy (and violations of MFN) arise. We next discuss both unilateral and regional carbon motivated trade policy arrangements, including three potential variants of carbon emission reduction based free trade area arrangements. One is regional trade agreements with varying types of trade preferences towards low carbon‐intensive products, low carbon new technologies and inputs to low carbon processes. A second is the use of joint border measures against third parties to counteract anti‐competitive effects from groups of countries taking on deeper emission reduction commitments. A third is third‐country trade barriers along with free trade or other regional trade agreements as penalty mechanisms to pressure other countries to join emission‐reducing environmental agreements. We differentiate among the objectives, forms and possible impacts of each variant. We also speculate as to how the world trading system may evolve in the next few decades as trade policy potentially becomes increasingly dominated by environmental concerns. We suggest that the future evolution of the trading system will likely be with environmentally motivated arrangements acting as an overlay on prevailing trade and financial arrangements in the WTO and IMF, and eventually movement to linked global trade and environmental policy bargaining.     

Innovation and Trade Policy Coordination: The Role of Firm Heterogeneity

Recent studies have concluded that R&D grants can induce firms to export and that exporting and innovating can be complementary activities at the firm level. Yet the trade literature has paid little attention to the scope of innovation policy as a stimulus to both trade and innovation. To investigate this question, we rely on a general workhorse model of trade and firm heterogeneity with firm investments in R&D activities. The interplay of innovation and trade policies uncover novel results. In particular, we show that the effects of either policy depend on the degree of protectionism in a country. Therefore, countries can respond differently to the same policy, and similarly to different policies. In such a context, different governments may face different trade‐offs in achieving a given target.     

Last line of resistance or a golden opportunity: Australian trade union responses to globalization

This contribution concentrates on the response of the trade union movement in Australia to globalization. Firstly, it outlines the evidence of the effects of globalization on labour markets, including the impact on wage inequaliry employment securiry and collective bargaining. Secondly, it looks at the strategic union response to the effects of globalization in terms of trade policy responses, international labour cooperation and traditional industrial campaigns on globalization issues. It suggests that unions can employ a combination of international and domestic strategies to deal with globalization.     

The impact of core labour standards on exports

Developed countries contend that trade in goods whose production is not in conformity with internationally recognized basic labour standards should be restricted, while developing countries view any attempt to link trade and labour standards as a form of protectionism that intends to end their comparative advantage. This paper provides an empirical examination of the relation between trade and core labour standards. It develops an export supply function and uses OLS techniques to test it for 58 non-OECD countries. It finds that only one core standard, the right to organize and collective bargaining, has a statistically significant negative impact on exports. The results are insensitive to the level of development of the countries included in the study. The main conclusion that emerges is that, ignoring the right to organize and collective bargaining, core labour standards do not play a significant role in trade performance.     

The internationalization of competition policy: implications for international business

In the post–Uruguay Round World Trading System and with the creation of the World Trade Organization (WTO), a new set of agendas on the governance of the world economy has emerged. Among them are the relationship between trade and social policy, trade and the environment, and trade and competition policy. These issues are new in the sense that policymakers have, until now, avoided drawing direct‐policy linkages between them. The main reason for this is that traditionally social and competition policies have been domestic policy domains that international policymakers were prevented from influencing. While environmental policy has been subject to several international negotiations, the link between trade and the environment has been relatively under‐discussed in the GATT. Moreover, there have been few international agreements that have drawn a direct link between trade and the environment.¹ The focus of this paper is the relationship between trade and competition policy. In particular, this paper seeks to address the issues related to international competition policy and the concerns and problems faced by international business in this context. ¹ An exception being the agreement on trade in endangered species (CITES). © 2000 John Wiley & Sons, Inc.     

Stabileres Tarifvertragssystem durch Stärkung der Allgemeinverbindlicherklärung?

The declaration of the general binding of collective agreements plays a minor role in Germany compared to other European countries. In particular, the number of extended wage agreements has declined greatly over the last two decades. Because of the declining bargaining coverage, calls for a stabilisation of the collective bargaining system are increasing. In this context, the greater use of the extension mechanism could play an important role. This article analyses the historical development of the instrument and explains different proposals for reforming the extension mechanism put forward by political parties and trade unions.     

Grenzen gewerkschaftlicher Verbraucherpolitik Anmerkungen zu Tonners Beitrag

The limits of trade union consumer policy — Remarks on the preceding paper by Tonner. In this contribution, the author discusses the limits that are set for trade unions when entering the consumer policy arena. Three levels of varying intensity with respect to the engagement in consumer politics are distinguished. The trade union movement can act as (a) the occasional representative of consumer interests; (b) the chief representative of specific consumer groups; (c) the chief representative of the general consumer interest. Arguments are stated in support of the view that the aspiration of trade unions to represent the general consumer interest cannot, within a democratically, pluralistically ruled society, be legitimated. To guard the specific consumer interests of their membership is a perfectly legitimate task for trade unions. Because of the interpersonal conflicts that arise it is, however, not in the interest of either employees or consumers that trade unions act as chief consumer advocates even for these specific interests. There is reason to believe that all sides are best served if trade unions devote themselves primarily to the representation of employee interests and only occasionally concern themselves with consumer affairs.     

Intermediate inputs,external rebalancing and relative price adjustment

The traditional multi-sector macro model without production inputs is a value-added trade model. This paper shows that calibrating such a misspecified value-added trade model to available gross-flow trade data – a common practice in the literature – can lead to mismeasured (i) preference weights and (ii) price elasticities. Further, the calibrated model can give substantially different predictions regarding the relative price response to external rebalancing, when compared to a preferred alternative model with inputs that is consistent with gross-flow trade data. We find that mismeasured preference weights and price elasticities both contribute sizably to deviations in model predictions and estimate correctly-measured parameters for the value-added trade model.     

The challenges and opportunities for the trade union movement in the transition era: two socialist market economies – China and Vietnam

Both China and Vietnam are undergoing a social experiment as they diverge from the path of their Soviet compatriots and attempt the transition to a ‘socialist market economy’. This article tackles the role of trade unions in China and Vietnam in the context of globalization and market-orientated economic reform by identifying both challenges and opportunities for the trade unions in the areas of policy formation at national level and participation in collective bargaining and dispute mediation at enterprise level. Trade unions in both countries will have a significant role on a wide range of social issues under their special political, social and economic systems in the transition era into the twenty-first century.     

Endogenous political organization and the value of trade agreements

In a bargaining model of endogenous protection, I introduce fixed costs of political-organization that need to be incurred by capitalists prior to actual lobbying. Unlike Maggi and Rodriguez-Clare [J. Pol. Econ. 106(3) (1998) 575] intersectoral capital mobility is disallowed. Nevertheless, I am still able to obtain their main result that a government with low bargaining power vis-à-vis the import-competing lobby precommits to a free-trade agreement. Further, with high fixed organizational costs, the government prefers to stay out of such agreements. Its maximum bargaining power consistent with signing a trade agreement has an inverse-V-shaped relationship with respect to the size of fixed costs.     

Negotiating a Stable Government: An Application of Bargaining Theory to a Coalition Formation Model

In this paper, we apply bargaining theory to a certain model of coalition formation. The notions of a feasible government and a stable government are central in the model considered. By a government, we mean a pair consisting of a majority coalition and a policy supported by this coalition. The aim of this paper is to establish which stable government should be created if more than one stable government exists or, in case there is no stable one, which feasible government should be formed if more than one feasible government exists. Several bargaining procedures leading to the choice of one stable (or feasible) government are proposed. We define bargaining games in which only parties belonging to at least one stable (or feasible) government bargain over the creation of a government. We consider different bargaining costs. We investigate subgame perfect equilibria of the bargaining games defined. It turns out that the prospects of a party depend on the procedure applied, and on the bargaining costs assumed. We also apply the coalition formation model to the Polish Parliament after the 2001 elections and apply the different bargaining games for the creation of a government to this example.