Optimal Trade Policy with Trade Imbalances

By Mostafa Beshkar (Indiana University at Bloomington) and Ali Shourideh (Carnegie Mellon University)

A salient feature of international trade is the presence of trade imbalances. How should governments conduct their trade policy under trade imbalances? In a forthcoming paper we ask if trade imbalances influence governments’ choices of trade policies under a standard dynamic trade model.[1] This analysis could shed light on the policy debates in recent years where a widening trade deficit has prompted calls for protectionist policies in the United States and other countries with major levels of trade deficit.


We use a dynamic economic model to study the potential impact of fluctuations in trade volumes and trade deficits on the unilaterally-optimal choice of trade and capital control policies—namely, policies that maximize a measure of welfare of the home country disregarding their effects on the rest of the world.

By using a dynamic framework in which international lending and borrowing—and hence trade imbalances—may occur endogenously, our analysis departs from most of the trade policy literature that focuses on static models with the assumption of balanced trade or an exogenously-given trade deficit.

Using a dynamic—as opposed to static—framework has several advantages for policy analysis. First, it allows researchers to study the relationship between economic fluctuations and trade policy. The vast literature on trade policy—which has concerned itself mostly with static impacts of trade policy—cannot properly address this relationship.

A second advantage of a dynamic framework for trade policy analysis is the ability that it affords researchers to study the potential interdependence between trade and capital control policies. This potential policy interdependence may have important implications for the design and benefits of trade agreements. For example, while trade agreements such as the WTO restrict trade policies, they leave exchange and capital controls to the discretion of the member governments. Therefore, following negotiated trade liberalizations, governments may have an incentive to use exchange and capital controls more actively to affect trade flows to their advantage. It is notable that shortly after its accession to the World Trade Organization, China was frequently accused of manipulating its exchange rate to affect the flow of goods and services.

The use of a dynamic framework is also advantageous for quantitative analysis of trade policy as it could match observed trade flows that involve substantial trade imbalances. The balanced-trade assumption in the previous literature poses a problem for quantitative analysis as it violates the observed trade data. The static trade literature has so far dealt with this problem in one of two ways. The first approach is to introduce aggregate trade imbalances as constant nominal transfers into the budget constraints. The second approach is to “purge” the data from imbalances, namely, conducting the analysis under the counterfactual in which trade is balanced.[2]  A dynamic approach, however, provides a more satisfactory solution by allowing trade imbalances to occur endogenously


A key determinant of optimal trade and capital control policy in a given period is the productivity of the home country relative to the rest of the world in that period. The time variation in these policies, however, depend critically on the set of policy instruments that are employed by the government.

An important case is one in which trade taxes are the only policy instruments at the government’s disposal—i.e., there are no capital control taxes. Under this scenario, there is significant variation in optimal trade policy over time.  In particular, in the absence of capital control taxes, the optimal level of import restriction and export promotion—namely, import taxes and export subsidies—is counter-cyclical.

The counter-cyclicality of import tariffs and export subsidies reflects the government’s desire to improve the country’s intertemporal terms of trade.  That is, individual households ignore their collective effect on the world interest rate and, thus, save and lend too much in booms and borrow too much in downturns, which negatively affects the interest rate for domestic households. To correct for this “inefficiency,” the government’s optimal policy response would be to decrease the price of consumption in high-productivity periods relative to low-productivity periods. This objective may be achieved by applying lower import tariffs together with higher export subsidies in low-productivity periods.

Figure 1 Panel A

Figure 1 Panel B

Figure 1 depicts the optimal level of import and export taxes that we calculate in our paper, for the United States for each year from 1995 to 2016. As can be seen in this figure, over this time period optimal tariffs vary between 27% and 33%, and export subsidies vary between zero and 6%. Nevertheless, if capital controls are used in lieu of export subsidies, the time-variation of import tariffs is virtually eliminated—with tariffs hovering around 25% for the entire period.

The gradual increase in trade protection in the first-half of the time period in Figure 1 reflects an optimizing government’s motivation to discourage borrowing by households from the rest of the world during this relatively fast growth period. Conversely, the gradual decline in the optimal level of protection after 2003 reflects the government’s desire to encourage domestic consumption in lieu of lending to the rest of the world.

Despite the significant time-variation in import taxes and export subsidies that is depicted in Figure 1, the total level of trade protection, measured by the product of import and export taxes, namely, (1+import tax)*(1+export tax), remains relatively constant (around 25%) for the entire time period. In other words, the desired relative price of domestic and imported goods may be implemented using a 25% import tariff alone. Nevertheless, to induce the desired interest rate—or, equivalently, the desired relative price of aggregate consumption across periods—both tax instruments are necessary. This observation suggests that the famous Lerner Symmetry Theorem should be interpreted cautiously in practice.

Remaining Questions

Given the insights we have discussed above, an interesting question that could be addressed in future research is whether capital controls could serve a useful purpose as a flexibility mechanism in trade agreements. Flexibility may be a desirable feature for trade agreements for at least two reasons. First, if political economy preferences are subject to shocks in the future governments will negotiate an agreement that includes a mechanism for policy flexibility such as the WTO Agreement on Safeguards.[3] Second, if trade agreements must be self-enforcing, flexibility in capital control policies could reduce the governments’ incentive to renege on the agreement at times when a surge in imports or a widening trade deficit increases temptations to leave an international agreement.[4]

The possibility of time variation in trade policy is also important in understanding the potential relationship between the state of the economy and optimal trade policy. This is particularly so in order to understand the pattern of optimal trade taxes over the business cycle and the potential relationship between the growth rate of the economy and the optimal conduct of trade policy.  Our model offers a tractable framework in which to explore these issues.


In conclusion, it is worth noting that although the magnitude of changes in optimal tariffs are significant, the quantitative analysis suggests that the gains from this variation are small. In particular, a constant tariff can achieve almost all of the gains from implementing the optimal policy. This finding also implies that under our framework, the negative externality of optimal capital control taxes on the rest of the world is very small.

These quantitative results, however, should be taken with a grain of salt as they hinge on various simplifying assumptions, including the assumption that labor is the only factor of production and no investment in physical capital takes place. Enriching the model by allowing for the possibility of physical capital formation could potentially magnify the welfare effects of capital control policies.


Bagwell, K., and R. Staiger, (1990); “A Theory of Managed Trade.American Economic Review, 80(4): 779-795.

Maggi, G., and R. Staiger (2011); “The Role of Dispute Settlement Procedures in International Trade Agreements.” The Quarterly Journal of Economics, 126, (1): 475-515.

Beshkar, M., and E. Bond, (2017); “Cap and Escape in Trade Agreements.” American Economic Journal – Microeconomics. 9(4): 171–202.

Beshkar, M., and A. Shourideh, (2020); “Optimal Trade Policy with Trade Imbalances.” Journal of Monetary Economics.

Ossa, R. (2016); “Quantitative Models of Commercial Policy.” Published in K. Bagwell and R. Staiger (eds) Handbook of Commercial Policy. Amsterdam, Elsevier.


[1] Beshkar and Shourideh (2020).

[2] See Ossa (2016).

[3] See Maggi and Staiger (2011), Beshkar (2010), and Beshkar and Bond (2017) among others.

[4] The logic here is similar to that of Bagwell and Staiger (1990).



Making Globalization More Inclusive

Making Globalization More Inclusive:

Lessons from experience with adjustment policies

Edited by Marc Bacchetta (WTO and University of Neuchâtel), Emmanuel Milet (Geneva School of Economics and Management) and José-Antonio Monteiro (WTO and University of Neuchâtel)

Policies aimed at helping workers adjust to the impact of trade or technological changes can provide a helping hand to the workforce and increase the benefits of open trade and new technologies. This publication contributes to the discussion on how governments can help make international trade more inclusive and ensure that the benefits of open trade are spread more widely.

Click here for further details and to download a copy of the book

The Impact of TRIPS and Compulsory Licensing on Developing Country Markets

By Eric Bond (Vanderbilt University) and Kamal Saggi (Vanderbilt University)

The Trade-Related Intellectual Property Rights (TRIPS) agreement of the World Trade Organization (WTO) requires that all WTO members provide a minimum level of patent protection for all types of intellectual property. This requirement has created a problem for developing countries in obtaining access to patented pharmaceuticals, because pharmaceutical companies are reluctant to sell drugs in middle and lower income countries due to the potential negative impact on prices in high income markets. The spillovers can result from the use of reference pricing in high income markets, whereby a high income country government uses an average of prices in other countries to determine the price that a patent holder can charge in its market.  Spillovers can also arise from illegal arbitrage trade.[1]

As a result of these potential spillovers, newly patented drugs may be unavailable or introduced with substantial delays in middle and low income markets.[2] TRIPS does, however, provide countries with the option of issuing a compulsory license (CL) if the market has not been served in a reasonable period of time. A country issuing a CL is required to provide adequate compensation to the patent holder. There have been a number of examples of the use of CLs to obtain access to patented pharmaceuticals by middle and low income countries since the advent of TRIPS, including drugs to treat AIDS, heart disease, and cancer.[3]

How does the requirement of patent protection under TRIPS, combined with the option of issuing a CL if the market isn’t served, affect the welfare of developing countries and patent holders? In a recent article, we address this question using a game-theoretic model to consider a patent holder’s decision of whether it should incur the fixed cost of entering a developing country market.[4] We show how the answer to this question depends on the imitative ability of the developing country to produce copies of the patented product and the level of fixed costs of entry relative to the profits from the market.

Prior to TRIPS, a developing country could obtain copies of patented products from imitators if it did not provide patent protection.  For countries where the cost of entry for the patent holder was high relative to the profits from entry, typically countries with relatively small markets, the patent holders would only enter if patent protection was provided. The country would then have to choose between providing patent protection and obtaining a high cost, high quality product, or not providing patent protection and obtaining a low quality and low cost imitation. The high entry cost countries would only provide patent protection if the quality of imitators was sufficiently low.

In contrast, for countries where the fixed costs were low relative to the profits from entry, the patent holder might still be willing to enter without patent protection if the quality of the imitators was not too high. These countries obtained a double benefit by not providing patent protection: the patented product was obtained at a low price and the copies were also available for those unwilling to pay the price for patented goods.

The absence of patent protection prior to TRIPS made CLs an unnecessary instrument for developing countries, because imitators could produce patented foreign products without requiring a license.  In fact, we show that the option of using a CL could actually make all parties worse off by reducing the incentive of developing countries to offer patent protection. The insight is that developing countries are better off under imitation relative to a CL and therefore have an incentive to preempt the possibility of the patent-holder resorting to a CL by not recognizing the patent. After all, the issuance of a CL is premised on the legal recognition of the underlying patent.

The TRIPS requirement that developing countries provide patent protection made developing countries worse off and patent-holders better off, because it raised prices of patented products by preventing imitators from providing competition for patent holders. The extent to which the option of a CL mitigates the loss to the developing countries from TRIPS depends on the country’s characteristics. For countries with markets sufficiently profitable that the patent-holder would have entered without a patent, TRIPS primarily benefitted patent-holders by eliminating competition from imitators. For countries that would have had to rely on imitators to provide the product prior to TRIPS, TRIPS provides access to the product through a CL. However, the delay required before a CL can be issued means that the country will not obtain access to a copy of the patented product as quickly as it would pre-TRIPS.

Finally, the fact that the patent holder obtains a royalty payment under the CL means that it might prefer a CL to entry if the return from entry is sufficiently low. Thus, the option of a CL could actually cause countries that provided patent protection pre-TRIPS to experience delay in obtaining access to the patented product under TRIPS. It should be noted that since developing countries do not take into account the profits of patent holders in making their decision whether to provide patent protection, the level of protection was below the socially optimal level pre-TRIPS.

We also consider the case in which the government of the developing country negotiates a price ceiling for which the patented product is to be sold in its market. The effect of the CL in this case depends on the relative bargaining power of the two parties during negotiations over the price ceiling. If the patent-holder has all of the bargaining power, then the government is able to use the threat of a CL to lower the price of the patented product. If the country has all of the bargaining power, the royalty payment required by TRIPS benefits the patent-holder by providing a minimum level of compensation that it must receive for entering the market. Thus, the ability to issue a CL primarily benefits the party whose bargaining position during price negotiations is relatively weaker.


Beall, R. and R. Kuhn, (2012); “Trends in Compulsory Licensing of Pharmaceuticals since the Doha Declaration: A Database Analysis.PLos Medicine 9(1): 1-9.

Bond, E. W., and K. Saggi, (2018); “Compulsory Licensing and Patent Protection: A North-South Perspective.Economic Journal 128 (May): 1157-79.

Cockburn, I.M., Lanjouw, J.O., and M. Schankerman, (2016). “Patents and the Global Diffusion of New Drugs.American Economic Review 106(1): 136-164.

Danzon, P., Y. R. Wang, and L. Wang, (2005); “The Impact of Price Regulation on the Launch Delay of New Drugs,” Journal of Health Economics 14: 269-92.

Goldberg, P. K., (2010); “Intellectual Property Rights Protection in Developing Countries: The Case of Pharmaceuticals.Journal of the European Economic Association 8: 326-53.


[1] See Golderg (2010).

[2] See Danzon, Wang, and Wang (2005), and Cockburn, Lanjouw, and Schankerman (2016).

[3] See Beall, R. and Kuhn, R. (2012).

[4] See Bond and Saggi (2018).


The WTO and Economic Development

Ben Zissimos (University of Exeter Business School)

My new edited volume tilted The WTO and Economic Development, brings together a collection of perspectives on different aspects of the purpose and institutional design of the World Trade Organization (WTO), and how these relate to economic development.[1]  The perspectives are contributed by a group of leading scholars in the economics of international trade.  The role that the WTO and its progenitor, the General Agreement on Tariffs and Trade (GATT), have played to date in facilitating economic development, and the role that the WTO can reasonably be expected to play in the future, is the unifying theme.

The following summary is based on my introductory chapter, which presents a synthetic literature review to develop context for the contributions that follow and draws basic insights.

Chapter 1, by Robert Staiger, sets out a comprehensive framework for formally incorporating non-tariff measures (NTMs) into a model for analyzing a multilateral trade agreement, taking tariffs into account as well.  The chapter notes that while developing countries tend to impose border NTMs on imports from developed countries, developed countries tend to impose behind-the-border NTMs on imports from developing countries.  A key contribution of the chapter is to show that an agreement involving border-NTMs is in fact amenable to a terms-of-trade motivation.  Since border-NTMs can exert a negative terms-of-trade externality on trade partners, by causing a reduction in demand for their exports, an agreement over border-NTMs has the same motivation of escaping from a terms-of-trade externality as in the conventional tariff-based ‘terms-of-trade theory’ of trade agreements.[2]

Chapter 2, by Chad Bown, adopts a more traditional focus on tariffs.  The motivation is compelling, arguing that there are 3.5 billion people in the world who have yet to benefit from an agreement to lower tariffs under the GATT/WTO, the overwhelming majority of whom are in developing countries.  The chapter tests for developing countries an implication of the terms-of-trade theory of trade agreements that has been shown to hold in developed countries.  The implication focused on in the chapter is that, through WTO negotiations, members are requested to take on lower tariff binding commitments in products for which they have higher market power, and thus where their tariffs (if left unchecked) would result in larger terms-of-trade externality losses for trade partners.  The chapter identifies well-defined groups of developing countries for which the implication holds, and groups for which it does not, showing that the terms-of-trade theory is relevant to developing-country trade liberalization through trade agreements but is not the only motivation.

Chapter 3, by Rodney Ludema, Anna Maria Mayda, and Jonathon McClure, studies the evolution of the so-called ‘MFN free rider problem’, an implication of the terms-of-trade theory.  In their earlier work, Ludema and Mayda show that an exporting country’s benefit from an MFN tariff concession by another country is proportional to exporter concentration.[3]  An exporting country’s willingness to pay for an MFN tariff concession on the product it exports with tariff concessions of its own depends on how much its refusal to offer concessions would reduce the MFN tariff concession.  The smaller the exporter, the less its refusal would mitigate the tariff cut, and thus the less costly it would be for the exporter to refuse to make a concession, thus free-riding on the concessions of other countries.  An intriguing contribution of the chapter is to show that, through the growth of trade with emerging economies such as China since 1993, the MFN free rider effect is found to have gotten worse.

Chapter 4, by Xuepeng Liu, considers a puzzle concerning so-called non-member participants (NMPs).  NMPs consist of three groups: colonies and overseas territories of GATT members; newly independent states; and provisional members.  NMPs are relevant here because they tend overwhelmingly to be developing countries.  The first econometric literature on the effects of the GATT/WTO explores whether member countries really have different trade patterns than outsiders, thus assessing the effectiveness of the GATT/WTO in liberalizing trade.[4]  The literature shows that they do, but in the process finds an ‘NMP puzzle’: while two formal GATT members trade 61 per cent more than the baseline case of neither country being a formal member nor an NMP, two NMPs trade 140 per cent more than the baseline.  It is counterintuitive that the NMPs should trade even more than formal members.  Chapter 4’s main contribution is to show that the ‘NMP puzzle’ can be resolved by undertaking two relatively simple modifications to the original gravity equation approach of the prior literature.

In Chapter 5, David DeRemer develops a model for analyzing a trade agreement when autarky is the (unique) outcome of non-cooperation over trade policy.  While the canonical model of trade agreements with perfect competition and political economy has proved to be powerful and flexible in explaining many aspects of trade liberalization under the GATT/WTO, it cannot motivate a trade agreement of the kind that DeRemer considers.[5]  Specifically, in the canonical model, if each government has a unilateral preference for autarky then they must have a joint preference for autarky as well.  This limits the scope for studying situations where developing countries have adopted autarkic trade policies for specific sectors, but where there may nevertheless be scope to open these sectors as part of a trade agreement.  For example, developing countries have commonly produced busses and trucks domestically behind high tariff walls.  The chapter adopts a familiar ‘Brander-Spencer’ type model in which to motivate and explore the scope for a trade agreement when autarky is the non-cooperative outcome.

Chapter 6, by Fabrice Defever and Alejandro Riaño, looks at the export promotion policies implemented by China, and how these have promoted the transition of China from autarky in the 1970s to the world’s largest exporting economy today.  The point of departure for this chapter is a set of stylized facts on firm exporting behavior that has been established in the economics literature for the world’s major trading economies: relatively few firms engage in exporting; exporting firms tend to be more productive and hence larger; most firms that do export sell only a small fraction of their output abroad.[6]  The chapter reveals that, on the face of it, the characteristics of Chinese exporters fit the stylized facts listed above. The most striking difference, the chapter finds, is that a third of firms export almost all of their output: China is thus characterized as having a ‘dual export sector’.  The overall conclusion of the chapter is that China’s export promotion policies have been responsible for creating its dual export sector, and have been instrumental in China becoming the world’s largest exporter.

Chapter 7, by Eric Bond, considers whether an efficient trade agreement should allow for gradual trade liberalization to mitigate adjustment costs.  Recent research has shown that the adjustment costs of moving productive resources between sectors in response to trade liberalization are significantly higher than previously thought.[7]  These costs are likely to be particularly high for developing countries, where adjustment is likely to involve geographical relocation between rural and urban settings.  The analytical approach taken in Chapter 7 is to examine the optimal liberalization path between two large countries, where workers face adjustment costs of moving between sectors.  The results show that if tariffs are the only policy instruments available, then developing countries should be allowed longer phase-in periods if their marginal costs of adjustment are higher than in developed countries.  Hence, the analysis shows that there may be a normative justification for so-called ‘special and differential treatment’ of developing countries.

Chapter 8, by Eric Bond and Kamal Saggi, contrasts the roles of price controls and compulsory licensing (CL) to improve consumer access to patented foreign products in developing countries.  While the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement created a storm of controversy, the eye of the storm was over the implication that, as a result of the agreement, it became more difficult for poor people in developing countries to access medicine at affordable prices.  Under the terms of the TRIPS agreement, if a patent holder refuses to grant access to its product on ‘reasonable’ commercial terms then a government may grant a CL to a different firm to produce the product.  The main lesson of the chapter is that the social value of CL depends crucially on entry costs and the size of the market, and is ambiguous.  This ambiguity seems to be a feature of outcomes under the TRIPS agreement more broadly, making it difficult to assess the extent to which it is beneficial or harmful overall.

The ninth and final chapter, by Mostafa Beshkar and Mahdi Majbouri, tests empirically the outcomes of disputes, focusing on whether or not they lead to litigation, taking explicit account of whether or not the dispute involves developed and/or developing countries.  The chapter focuses on the fact that developing and developed countries show divergent behavior in the dispute settlement process.  A surprising pattern uncovered in Chapter 9 is that, in a dispute between a developed and a developing country, litigation is more likely if the developed country is the defending party.  As detailed in the chapter, 62 per cent of disputes in which a developed country presses charges against a developing country are settled without establishing a dispute panel. In contrast, only 44 per cent of disputes are settled without establishing a dispute panel if a developing country mounts a dispute against a developed country.  Importantly, the chapter shows econometrically that this asymmetry disappears after 2001, when the Advisory Centre on WTO Law (ACWL) was established to make available advice and subsidies to poorer countries, to help them with the costs of mounting a WTO dispute.


Bagwell, K., and R.W. Staiger, (1999); “An Economic Theory of the GATT.”  American Economic Review 89: 215-248.

Bagwell, K., and R.W. Staiger, (2002); The Economics of the World Trading System.  MIT Press, Cambridge (Mass), US.

Bernard, A.B., J.B. Jensen, S.J. Redding, and P.K. Schott, (2007); “Firms in International Trade.” Journal of Economic Perspectives 21(3): 105-130.

Dix-Carneiro, R., (2014); “Trade Liberalization and Labor Market Dynamics.” Econometrica 82(3): 825-885.

Ludema, R., and A.M. Mayda, (2009); “Do Countries Free Ride on MFN?” Journal of International Economics 77(2): 137-150.

Ludema, R., and A.M. Mayda, (2013); “Do Terms-of-Trade Effects Matter for Trade Agreements? Theory and Evidence from WTO Countries.” Quarterly Journal of Economics 128(4): 1837- 1893.

Melitz, M.J., and S.J. Redding (2014); “Heterogeneous Firms and Trade.” Handbook of International Economics, 4th ed, 4: 1-54.

Rose, A., (2004); “Do We Really Know That the WTO Increases Trade?” American Economic Review 94(1): 98-114.

Tomz, M., J.L. Goldstein, and D. Rivers, (2007); “Do We Really Know That the WTO Increases Trade? Comment.”  American Economic Review 97(5): 2005-2018.

Zissimos, B., (forthcoming) The WTO and Economic Development, accepted for publication by MIT Press, Cambridge (Mass), US.


[1] See Zissimos (forthcoming).  The MIT Press have kindly allowed me to post the full text of this volume on my website until the book appears in print.  Please see the above reference for a link.

[2] See Bagwell and Staiger (1999, 2002).

[3] See Ludema and Mayda (2009, 2013).

[4] See Rose (2004), and Tomz, Goldstein and Rivers (2007).

[5] The canonical model is due to Bagwell and Staiger (1999, 2002).

[6] See Bernard, Jensen, Redding and Schott (2007), and Melitz and Redding (2014).

[7] See Dix-Carneiro (2014).

Protection in Government Procurement Auctions

By Matthew T. Cole (California Polytechnic State University), Ronald B. Davies (University College Dublin), and Todd Kaplan (University of Exeter Business School and University of Haifa)

Government procurement contracts are a large part of many economies, often accounting for 15-20% of GDP.[1] Given the significant size of these contracts and their public-sector nature, it is unsurprising that there is a long-standing tradition of protecting domestic bidders from foreign ones. A standard method of doing so has been to use a “price preference”, that is, awarding the contract to the lowest domestic bidder even if there are lower foreign bids, just so long as that domestic bid is not too much higher than the lowest foreign bid.  For example, under the European Community’s rules, contracts were awarded to a member firm so long as its bid was no more than 3% higher than the lowest non-member-bid.[2] Obviously, this is not the only method of discriminating against foreigners with tariffs being but one alternative. Despite this history, in step with the overall drive towards trade liberalization, efforts have been taken towards reducing the use of price preferences. Chief among these was the 1996 Government Procurement Agreement (GPA) which would have enforced non-discrimination in contract bidding among participating countries.[3] Importantly, this agreement which covers a subset of WTO members primarily addresses price preferences and not other discrimination mechanisms, with tariffs still being permitted as per other WTO regulations. Thus, there is a need to understand how different methods of protectionism in procurement contract auctions compare with one another. This is especially true in the current international climate where there appears to be a marked shift towards protectionism. Comparing these policies is the goal of our analysis.[4]

To do so, we modify a standard auction model in which two firms, one domestic and one foreign, are each endowed with a privately-known cost. Armed with this knowledge, the firms simultaneously submit expected profit-maximizing bids to the government under one of two policy settings. In the first, consistent with practice, we impose a price preference where the contract is awarded to the domestic firm so long as its bid is no more than a fixed percentage p higher than that of the foreign firm. The other is an ad valorem tariff t which is applied to the foreigner’s bid should it win. Note that this latter is equivalent to a tariff on the foreigner’s cost since there is a one-to-one mapping between winning bids and firm costs.

From the firms’ perspectives, there is an equivalence across the two policies, that is, for each price preference level p there is a tariff t = p that is equivalent both in terms of the probability of winning and expected profits. Intuitively, this happens because if the government replaces the price preference with a tariff of the same level, when the foreign firm increases its bid so that after-tariff profits are the same, this does not alter the bidding behaviour of the domestic firm, meaning that the probability of winning and expected after-tariff profits remain the same.

Turning to the government, we assume that it chooses its policy to maximize the expected sum of three things: the surplus generated from the contract (i.e. minimize the expected bid), expected tariff revenues (which may be costly to collect), and, given the inherently political nature of trade policy, the weighted profits of the domestic firm (where the weight represents the value of private profits relative to public revenues). When tariffs are costless to collect, the equivalence for firms holds for the government as well. This occurs because, even though a shift from a price preference p to a tariff of the same rate increases the expected cost of the contract (since the winning firm sets a higher bid), this increase is exactly offset by the rise in expected tariff revenue. In addition, with costless tariffs the government’s preferred policy is one that discriminates against foreign bidders, often to the detriment of global welfare (the sum of all players’ payoffs). Thus, under this condition, at its worst the GPA would have no impact on the level of protection between members in procurement contests. Further, if tariffs are constrained below the equivalence level under the WTO so that GPA signatories could not use their equivalent tariffs, the agreement would result in a more level playing field.

These results, however, assume that tariffs are costless to collect, something that runs counter to the empirical evidence.[5] When there are, for example, enforcement and administration costs associated with tariffs, switching from a price preference to the firm-equivalent tariff results in lower expected government welfare since the foreign firm’s bid goes up by more than the after-collection cost tariff revenue. Because of this, so long as expected tariff revenues are rising in the tariff, the government finds protection less attractive when using a tariff and, if forced to abandon the price preference, it would set it such that protection is smaller than under its preferred price preference. Thus, in this setting, even if the tariff is unconstrained by WTO regulations, one would expect the introduction of the GPA to be efficiency-improving.

Together, these results suggest that the GPA, in particular with binding limits on tariffs under preferential trade agreements, can be expected to have lowered protection levels in government procurement auctions and increase global welfare. This has important lessons for the current trade negotiation situation. First, with threats to exit various trade agreements rising rapidly, our findings indicate that if countries were to quit the GPA this would result in rising protectionism with consequent welfare losses. Second, even if the GPA remains intact, if political pressures lead to rising tariffs even under the oversight of the WTO, this may serve to roll back the gains achieved by the GPA.


Branco, F., (1994); “Favoring Domestic Firms in Procurement Contracts.” Journal of International Economics, 37, 65-80.

Cole, M.T., R.B. Davies, and T. Kaplan, (2017); “Protection in Government Procurement Auctions,” Journal of International Economics, 106:134-142.

Riezman, R., and J. Slemrod, (1987); “Tariffs and Collection Costs.” Review of World Economics, 123, 545-549.

World Trade Organization, (2013); “Government Procurement.” Retrieved from http://www.wto.org/english/tratop_e/gproc_e/gproc_e.htm on July 31 2013.


[1] World Trade Organization (2013).

[2] Branco (1994).

[3] See WTO (2013) for details.

[4] For full analysis, see Cole, Davies and Kaplan (2017).

[5] See Riezman and Slemrod (1987).

Export Competitiveness of Developing Countries and US Trade Policy

By Shushanik Hakobyan[1] (International Monetary Fund)

With rising US trade protectionism against its major trading partners, the Generalized System of Preferences or GSP, a long-running scheme of tariff exemptions meant to aid exporters in developing countries, may get less attention. While GSP imports account for about one percent of total US imports, they account for about ten percent of all imports from GSP beneficiaries with considerable heterogeneity across countries.[2] Since the early 1970s, the GSP has given a boost to these exporters by granting their products duty-free access to the US market thereby aiding the efforts to expand their industrial and exporting capacity. But as with any policy, the devil is in the details. Despite the benefits, uptake has been low due to a number of reasons, including a low margin of preference granted by GSP, uncertainty about the permanence of the GSP program, and the statutory caps on benefits designed to prevent “abuse” by successful exporters.[3] My research focuses on the latter and explores whether these caps are well-targeted and serve their designated purpose.[4]

One of the features of the US GSP, the so-called Competitive Needs Limits, or CNLs, act as caps on benefits by excluding exporters exceeding CNL thresholds. There are two criteria to identify country-product pairs that have exceeded CNLs: (1) imports exceeding a certain value threshold in a calendar year, set at $180 million in 2017, and increasing by $5 million every year; (2) import share of a country in a given product exceeding the percentage threshold set at 50 percent. Meeting either criteria triggers an automatic exclusion of a country-product pair from GSP in the following year. The range of imports that exceed these thresholds varies greatly in terms of value. For example, the eligibility of Indian exporters of gold necklaces and neck chains was revoked in 2008, following their exports reaching $266 million in the previous calendar year (the value threshold in 2007 was set at $130 million). Likewise, the Argentine exporters of green olives lost their GSP eligibility in 2008 after accounting for 66 percent of total imports of green olives into the US in 2007. It is worth noting that Argentina had not exported green olives in the previous five years prior to 2007.

There are three ways to avoid losing the GSP benefits due to the CNL. First, if total US imports of a given product are trivial, at most $23.5 million in 2017 (set to increase by $0.5 million every year), a de minimis waiver could be applicable. Second, the percentage threshold may be waived if a directly competitive product was not produced in the US on January 1, 1995 (504(d) waiver). Lastly, country-product pairs exceeding the value or percentage CNL may petition for a more “permanent” CNL waiver.

To evaluate the impact of these caps on exporters, I examine the universe of all country-product pairs that have been excluded for more than two years from GSP over the period of 1997-2010. There have been 202 country-product pairs that met the CNL criteria in this period and were excluded from the GSP, accounting for $7 billion in imports (in the pre-exclusion year) or about 31 percent of US imports claiming GSP on average over this period. I estimate country-product level regressions of the value and share of imports on a set of binary variables indicating the first, second and third year of exclusion.

I find that the CNL exclusions are associated with a continuous decline in exports and import shares for up to three years after the exclusion, leading to a 75 percent drop by the third year of exclusion relative to the pre-exclusion average. Similarly, import shares drop by 42 percentage points from an average of 63 percent prior to the exclusion. This drop is predominantly driven by exporters who meet the percentage threshold with lower valued exports. These results are robust to employing volume data instead of values. Furthermore, the effect is larger for products facing higher MFN tariff rates. By the third year of exclusion, the value of imports and import shares of exporters eligible for a de minimis waiver drop by 50 and 75 percent, respectively, relative to pre-exclusion averages. In contrast, the impact of CNLs on the largest country-product pairs that exceeded the value threshold is negligible.

A related question of interest is the potential impact of CNLs on imports from other GSP beneficiary countries. If CNL-affected countries are unable to continue exporting to the US, who fills the void — other GSP countries or non-GSP countries? I find that import shares rise considerably more for non-GSP countries. By the third year of exclusion, the share of imports from other GSP eligible countries increases by 7 percentage points from a pre-exclusion average of 7 percent, whereas the share of imports from non-GSP countries rises by 29 percentage points (pre-exclusion average share is 25 percent).

Arguably, CNLs do not serve their intended purpose of identifying exporters who no longer need the preferential market access and allowing other GSP beneficiary countries benefit more from the program. Instead, CNLs tend to target small exporters, forcing them to stop exporting to the U.S. altogether, and mostly benefit non-GSP exporters.

These findings call for tweaks to the design of the program. Two simple changes can be made to boost the utilization of the program. First, since percentage CNL fails to identify successful exporters, a more holistic approach that takes into account both the value of imports and market share is needed to accurately detect such exporters. Second, the analysis of exports over a longer period (instead of the statutory one year) could go in hand with the previous suggestion by capturing the export dynamics of given products. These simple changes would ensure a lasting market access for the countries whom the GSP scheme is intended to help.


Blanchard, E., and S. Hakobyan, (2015); “The U.S. Generalized System of Preferences in Principle and Practice,” The World Economy 38(3).

Hakobyan, S., (2015); “Accounting for Underutilization of Trade Preference Programs: U.S. Generalized System of Preferences,” Canadian Journal of Economics 48(2), 2015.

Hakobyan, S., (2017a); “Export Competitiveness of Developing Countries and U.S. Trade Policy,” The World Economy 40(7).

Hakobyan, S., (2017b); “GSP Expiration and Declining Exports from Developing Countries,” Working Paper, 2017.

Ornelas, E., (2016); “Special and Differential Treatment for Developing Countries,” in Handbook of Commercial Policy, Kyle Bagwell and Robert W. Staiger (eds.), Vol. 1B, Amsterdam, North-Holland: Elsevier.


[1] The views expressed in this column are those of the author and should not be attributed to the IMF, its Executive Board, its management, or its member country governments.

[2] See Ornelas (2016) for a general introduction to GSP, an aspect of special and differential treatment for developing countries under the World Trade Organization.

[3] See Blanchard and Hakobyan (2015), Hakobyan (2015, 2017b).

[4] See Hakobyan (2017a).

Summary of the 5th InsTED Workshop at Syracuse University

We would like to thank The Department of Economics and the Maxwell School of Citizenship and Public Affairs, Syracuse University, for hosting and sponsoring the 5th InsTED Workshop.  We are also grateful for sponsorship and organizational support from the Moynihan Institute of Global Affairs, as well as sponsorship from the Program for the Advancement of Research on Conflict and Collaboration (PARCC) and the University of Exeter Business School.  The workshop took place at the Maxwell School from May 15th-16th 2018.  Special thanks go to Kristy Buzard and Devashish Mitra as joint chairs of the local organizing committee, and Juanita Horan for her extremely helpful interactions with everyone.

The program comprised of 18 papers ranging over four broad topics at the intersection of institutions, trade and economic development.  The first was global value chains, focusing on how they are determined at the firm level, and what their implications are for economic outcomes, especially in the developing world.  The second topic examined ongoing concerns about the implications of trade integration for income distribution, with emphasis on a developing country perspective.   The third concerned the interaction between trade integration or other institutional reform and resource allocation.  The fourth was on institutional constraints on international trade policy, including a look at the implications of restrictions imposed by the World Trade Organization.  There now follows a summary of all the papers presented at the workshop, organized under these four topic headings.  A bibliography, together with links to papers where available, is provided at the end.  Please note that for brevity the summary mentions presenters’ names but not those of their co-authors.  This information is contained in the bibliography.

Global Value Chains: Their Determinants and Implications

The spread of global value chains (GVCs) over the last thirty years or so has been a key new feature of the current wave of globalization, and important for the integration of developing countries into the world economy.  At the broadest level, the spread of GVCs has been facilitated by innovations in information and communication technology, the deepening of trade liberalization and ongoing reduction in transport costs, and political developments principally involving the fall of the iron curtain.  But in this globally more integrated environment, there is growing appreciation that firm-level decisions play a critical role in the determination of how global value chains actually form.  The outcome of these decisions has been characterized in terms of GVCs forming either as ‘spiders’, where a central ‘body’ imports inputs for assembly from various ‘legs’ that originate in different countries, or where a product is assembled sequentially along the length of a ‘snake’.  Such trade in intermediate inputs now accounts for 70% of global trade, spanning not just developed but developing countries as well.

The keynote address by Pol Antràs discussed his research project to model how firm-level extensive margin sourcing decisions are made, that give rise to the formation of GVCs.  His motivation of the need for a new model was that the canonical Melitz model renders firm export decisions tractable by assuming constant (exogenous) marginal costs, while firm import decisions are made specifically to lower marginal costs which are therefore endogenous.  The interdependence in a firm’s extensive margin import decisions complicates the firm’s problem considerably.  In the case of a spider, this involves a combinatorial problem with 2J possible choices, where J denotes the number of possible source countries.  In the case of a snake, the problem is similarly complex.

Antràs presented two papers, which provide tractable ways to model firm decisions in the cases of spiders and snakes respectively in ways that can be estimated structurally in the data.  In the case of spiders, the modelling approach is to apply an iterative algorithm that exploits complementarities in the decision of a firm to import from particular markets, and uses lattice theory to reduce the dimensionality of the firm’s optimal sourcing strategy problem.  The results show that while the ‘China shock’ resulted in an overall decline in domestic sourcing by US firms, the most productive firms actually increased domestic sourcing due to the cost savings derived through sourcing from China.  In the case of snakes, where the value chain is sequential, Antràs showed that the lead firm’s problem becomes one of solving the least cost path through a sequence of suppliers.  By applying a different algorithm the paper shows that, other things equal, it is optimal to locate relatively downstream stages of production in relatively central locations.  He then discussed counterfactual exercises that illustrate how changes in trade barriers affect the extent to which various countries participate in domestic, regional or global value chains, and traces the real income consequences of these changes.  Using this approach, substantial income gains are shown to arise from the increased participation of low-income countries in GVCs.

A key question motivating the literature on the extensive margins of trade is whether better firm performance gives rise to exporting or, conversely, exporting improves firm performance.  A particular form of this question is as follows: if offered the opportunity to export through a marketing arrangement in a developed country, can firms in developing countries upgrade the quality of the goods they produce and export, thereby increasing their incomes?  Rocco Macchiavello presented a paper on the case of the Nespresso sustainable quality program in Colombia.  The dataset constructed for the paper matches detailed administrative data on the universe of Colombian Coffee farmers with transaction-level data along three stages in the coffee chain, from the export gate to the farm gate.  Machiavello and his collaborators find that the program induced farmers to upgrade their coffee plantations, expand their farms as well as production, increase the quality of the coffee produced, and the loyalty of their marketing arrangement.  Most notably, a price premium of approximately 5-8% is fully transmitted along the supply chain, from the export gate to the farm gate, thereby bringing significant income gains to farmers in the developing world.  This paper therefore adds to the evidence supporting the view that gaining the opportunity to export can indeed enhance firm performance.

While GVCs can potentially increase incomes by creating cost advantages and quality improvements, there is widespread concern that cost advantages may be gained through lax environmental and labor regulation in countries where suppliers are located.  Sebastian Krautheim presented a paper studying this issue both theoretically and empirically.  In the model of his paper, a Northern firm can save costs by outsourcing to a Southern supplier that uses a cost-saving but unethical technology.  Contracts are incomplete, so that a firm has limited control over unethical technology choices of suppliers along the value chain.  The technology is a credence characteristic, in that consumers care about it but cannot know what it is.  However, the model features a non-governmental organization (NGO) that can reveal the technology being used.  Using the unethical technology creates an incentive to increase scale, but this also increases the probability of being detected by the NGO.  The paper provides empirical support for the model’s prediction that a high cost advantage of ‘unethical’ production in an industry and a low regulatory stringency in the supplier’s country favor international outsourcing as opposed to vertical FDI.

Trade Integration and Income Distribution

There has long been a concern that deeper trade integration causes an increase in inequality.  This is the focus of the famous Stolper-Samuelson Theorem, which arises directly from the classic Hecksher-Ohlin model and in a wider set of settings as well.  It predicts that if, compared to the South, skilled labor is relatively abundant in the North while unskilled labor is relatively scarce, then deeper trade integration will drive an increase in inequality in the North and a decrease in the South.  Previous academic debates tended to focus on the rise in inequality in the North, and the extent to which trade integration with the South was ‘to blame’.

In her keynote address, Nina Pavcnik presented her literature review that assesses the current state of evidence on how international trade shapes inequality and poverty.  Her review focuses mainly on developing countries, reflecting the fact that there is now more evidence in that context, but her discussion drew parallels to the empirical evidence on developed countries as well.  Her review also discusses perceptions about international trade in over 40 countries at different levels of development, including perceptions on trade’s overall benefits for the economy, trade’s effect on the livelihood of workers through wages and jobs, and trade’s contribution to inequality.  In framing the review, she noted that while most studies of developed countries focus on import shocks, studies of developing countries present evidence on export shocks as well to provide a more nuanced picture.

One insight that emerges from Pavcnik’s review is that losers from trade liberalization tend to be geographically concentrated and persistent over time because the costs are large.  Another insight is that worker-firm affiliation matters for how individuals are affected by trade liberalization.  Better performing firms tend to be better equipped to respond to the opportunities arising from trade liberalization.  Declines in industry employment from import competition are concentrated in less productive firms and workers.    A third insight is that one cannot ignore the effects of the informal sector in developing countries.  In some cases, international trade supports economic development by promoting the transfer of labor from inefficient informal firms to more efficient formal firms.  In others, especially where labor markets are poorly functioning or government support for those displaced from employment by trade is absent, the informal sector can serve as a coping mechanism for trade shocks.  Pavcnik noted that these outcomes are in some cases at significant variance to the predictions derived from the classic H-O model, especially because it does not have a role for firms.  The main policy recommendation to come out of her review was that governments must support workers and not jobs, because it is inevitable that the gains from trade are realized through the destruction of jobs, and the costs to workers are substantial.

The program featured two papers that studied the effects of trade policy in India.  The paper presented by Beyza Ural Marchand studies the distributional implications, with a particular focus on the poor, by asking: ‘what would be the distributional effects of eliminating the current protectionist structure?’  Thus her focus is on the welfare implications of a move from current trade policies to free trade.  The welfare effects are estimated through household expenditure and earnings effects of liberalization. The results indicate that Indian trade policy is pro-poor through the earnings channel, as its elimination leads to higher welfare losses for poorer households. But it is pro-rich through the expenditure channel, as its elimination leads to higher welfare gains for poorer households.  On balance, surprisingly, Marchand finds that Indian trade policy is regressive overall.

The paper presented by Ariel Weinberger investigates the liberalization episode in India during the 1990’s, which has been characterized by large and unexpected changes in trade and foreign investment policies.  Contrary to what might have been expected, given the secular decline in labor shares since the 1980s, his paper finds that trade reforms mostly raised the labor-to-capital relative factor shares in India. A reduction in capital tariffs and liberalization of FDI raise the share of income paid to labor relative to capital. His results reveal access to foreign capital as a new mechanism through which openness affects factor shares: imported capital augments technical change and potentially reduces rental rates, both of which raise the relative labor share.  Weinberger and his collaborator attribute the observed overall decline in the labor share to domestic deregulation policies and credit expansion.

Richard Chisik reversed the direction of enquiry relative to the papers above.  Rather than look at the effects of trade on inequality, his paper considers the effect of inequality on trade.  The prior literature notes that a foreign transfer may generate a ‘Dutch disease’ type effect in the recipient country: a transfer brings about a real exchange rate appreciation via an increase in wages that can reduce the size of the manufacturing sector.  This may reduce manufacturing exports or even eliminate a comparative advantage in manufacturing altogether.  In this literature, remittances have been considered isomorphic to foreign aid in causing the Dutch disease. Chisik’s paper questions this apparent similarity.  His paper argues that, whereas aid generates a Dutch disease effect, remittances can lead to growth of manufacturing.  The reason is that (ironically) aid tends to go to wealthier individuals who spend the money on non-traded services, which does appreciate the real exchange rate and shrinks the manufacturing sector, while remittances tend to go to poorer individuals who spend on manufactures which tends to increase the size of that sector.  The differing effects on the relative size of the manufacturing sector have, in turn, different bearings on comparative advantage.  The paper presents econometric results supportive of their model.

Rather than focus directly on trade and inequality, Ben Zissimos looked at how the inequality created by international trade can threaten the survival of dictatorships, especially in the face of world price shocks.  In his paper, the survival of dictatorships is taken to be a bad thing because they tend to support extractive economic institutions that fail to promote economic development.  The theory developed in the paper predicts that, in food exporting dictatorships, a world food price spike can provoke the threat of revolution.  Dictatorships are predicted to respond by making transfers using export taxes, hence defusing the threat of revolution and forestalling democratization.  The prior literature on institutions and development has tended to focus on the use of domestic redistributive taxation for the purposes of defusing the threat of revolution.  But the paper presented by Zissimos draws on evidence to suggest that dictatorships do not install domestic redistributive capacity for fear that it will be used to tax away their wealth.  Trade taxes, which are available to dictators, are used instead for this purpose.  Hence the paper proposes a new motive for the use of trade policy.  It also provides econometric results supportive of the predictions of the model.

Trade and Resource Reallocation Effects of Trade Integration and Institutional Reform

As tariffs have been reduced through multilateral trade rounds and the formation of free trade agreements, attention has shifted to other measures such as product standards, intellectual property protection, and infrastructure in an effort to facilitate integration where appropriate.

The paper presented by Walter Steingress quantifies the heterogeneous trade effects of harmonizing standards on product entry and exit as well as export sales.  Using a novel and comprehensive database on cross-country standard equivalences, the paper identifies standard harmonization events.  To track harmonization events, the paper presents a new correspondence table between the International Classification for Standards (ICS) and Harmonized System (HS) codes.  The results Steingress reported show that, on average, standard harmonization leads to a 0.5% increase in export sales. This effect is driven by an increase in the intensive margin, a decrease in prices and an increase in the quantities sold.  The paper argues that these results are compatible with a theoretical framework where standard harmonization leads to higher fixed costs as companies have to adapt to the new standards, but simultaneously reduced variable costs, thus increasing overall trade flows.

In her paper, Magdalene Silberberger broaches the impact of trade liberalization on health, safety and environmental (HSE) standards.  She and her collaborator ask whether tariff liberalization causes ‘regulatory chill’, meaning that countries are reluctant to implement HSE standards, or instead causes a race to the top as governments seek to use standards as non-tariff barriers to trade.  Her paper analyzes annual country-by-industry data on notifications of changes in sanitary and phytosanitary standards by WTO members. The results suggest that the impact of increased trade pressure depends on whether domestic producers are likely to gain or lose from a change in standards. Regulatory chill is the dominant response in most countries, but countries in which producers can adapt to standards relatively cheaply appear to race to the top.  Consequently, that paper concludes that tariff liberalization is associated with a divergence in standards across countries.

Shifting the focus from standards to patents, Tom Zylkin explored the effects of cross-border patents on international trade.  His paper highlights an ambiguity as to what one might expect here.  On the one hand, a firm might file a patent in another country because it wants to protect a good that it plans to export there.  On the other hand, the reason for filing a patent in another country might be that the firm wants to produce a good there instead of exporting it.  So, he argued, cross-border patents could be complements or substitutes to trade.  Using a highly disaggregated database of all patents filed in and out of developed and developing countries, his paper provides the first systematic analysis of how bilateral trade responds to bilateral filings.  It reports results suggesting large roles for geographic as well as industry-level heterogeneity, suggestive of competing motivations for cross-border patenting.  Patents promote bilateral exports—and negate bilateral imports—in high-demand elasticity industries, but can have the opposite effect in industries where the products are primarily used as intermediate inputs and/or between countries that are not far apart geographically.

The final two papers in this section consider the effects on economic performance of fundamental changes to the domestic economic and political environment.  Mingzhi (Jimmy) Xu‘s paper studies the aggregate and distributional impacts of China’s high-speed railway (HSR) network.  China’s HSR is a passenger rail network that covers 29 of the country’s 33 provincial-level administrative divisions and exceeds 25,000 km/16,000 miles in total length, accounting for about two-thirds of the world’s high-speed rail tracks in commercial service.  Xu argued that HSR connection generates productivity gains by improving firm-to-firm matching efficiency and leading firms to search more efficiently for suppliers.  His paper first provides reduced-form evidence that access to HSR in China significantly promotes exports at the prefecture level.  It then constructs and calibrates a quantitative spatial equilibrium model to perform counterfactuals, taking into account trade, migration, and outsourcing. The quantitative exercise reveals that the construction of HSR between 2007 and 2015 increased China’s overall welfare by 0.46%, but was also associated with an increase in national inequality. In addition, the paper finds that gains from HSR are larger when labor migration costs are higher, implying that the HSR project is well suited to a country like China, which features high internal migration barriers.

Ama Baafra Abeberese’s paper considers the implications of democratic reform for firm productivity, and in particular the impact of President Suharto’s unexpected resignation from the Presidency of Indonesia in 1998, after more than three decades in the post.  The basic idea underpinning the paper is that politicians can create high entry barriers for firms in order to collect rents from those that do enter.  Arguably, since this concentrates the gains from economic activity, democratically elected politicians will be less able to create such barriers without being displaced from office, and so the environment under democracy should be more competitive.  However, the effect on firm productivity is ambiguous since a more competitive environment may make it more difficult for firms to become established.  Baafra’s paper uses the fact that, in Indonesia, local mayors’ terms were asynchronous.  This asynchronicity of terms means that the paper can identify variation in the productivity of firms operating under mayors appointed by Pres. Suharto versus mayors who were democratically elected after Suharto stepped down.  The main result Baafra presented was that democratization did in fact boost productivity, and more so in industries that were shown to be politically connected to the Suharto regime and hence presumably more sheltered when he was in office.

Institutional Constraints on Trade Policy

While it might be collectively rational for countries to adopt free trade, it is often individually rational for a government to adopt some degree of trade protection.  This observation has been used to provide motivation for why governments sign up to institutional measures that constrain their abilities to set trade policy unilaterally, often in the form of a trade agreement.  This way of thinking forms the basis for the literatures on the purpose of the General Agreement on Tariffs and Trade (GATT), now absorbed into the Articles of the World Trade Organization (WTO), as well as the purpose of preferential trade agreements.

David DeRemer opened the discussion of these issues at the workshop with a paper that provides a new framework for thinking about international trade agreements in modern trade environments such as those involving offshoring, and rent seeking by foreign governments.  These are environments that extend beyond those which standard models of trade agreements are set up to consider.  His presentation started out by taking a stance on what distinguishes modern trade negotiation environments from the earlier era.  The new framework he developed focuses on how trade agreements help countries to escape from prisoner’s dilemmas in which each government disregards the effects of local price, as opposed to world price, changes on trading partners.  He argued that, typically, these local prices matter because they affect foreigners’ producer surplus or value-added.

His paper considers trade agreements that achieve the stable end-point of reciprocal negotiations, meaning a situation where neither government can gain from policy changes that affect net export value equally.  The paper shows this end point is Pareto efficient for governments, so it is a suitable prediction for the trade negotiation outcome.  This stable and efficient outcome for modern trade environments yields new predictions that are consistent with empirical evidence.  For example, more politically organized exporters with large supply elasticities compel governments to undertake greater reductions in cooperative import tariffs from trade negotiations.  In this setting, governments jointly pursue gains for exporters to the extent that they would assess losses for domestic firms from import competition to be outweighing gains for consumers.

Woan Foong Wong’s paper focused specifically on the main WTO rules that govern free trade agreement (FTA) formation.  Her paper is based on a three country ‘competing exporters model’, where any two countries compete to export a given product to the third country.  An FTA can then be formed between two countries, leaving the third one out, or all three countries can adopt global free trade, with the outcome being endogenously determined.  FTA formation under Article 24 of the GATT/WTO requires that external tariffs not be raised, and all internal tariffs be removed.  Wong’s paper examines the implications of the requirement to remove internal tariffs by comparing the outcome when this requirement is adhered to with when it is relaxed.  She showed that requiring FTAs to eliminate internal tariffs makes the non-member better off although it simultaneously reduces the likelihood of achieving global free trade by encouraging free-riding on its part.  The reason is that setting lower internal tariffs creates an incentive for members to set lower external tariffs, since they compete more aggressively for the third market, which benefits the non-member.  This problem is avoided by customs union members who, unlike FTA members, coordinate their external tariff.  Therefore, surprisingly, in the case of FTA formation removing the ‘free internal trade requirement’ increases the parameter space where global free trade is a stable outcome.

Other papers at the workshop undertook econometric work to explore the implications of trade agreement formation.  The paper presented by Kishore Gawande undertook the first econometric test of the commitment-based theory of trade agreements.  The idea of this theory is that import-competing sectors where industry interest groups know they can lobby the government for protection will end up with tariffs set above efficient levels and over-investment in capital.  But if governments realize that they cannot receive sufficient compensation for such long-run distortions, they may choose to sign a trade agreement and thus tie their hands to efficient trade policy, thereby shutting down lobbying altogether.  Gawande’s presentation reported econometric results testing this theory against industry-level and firm-level data, and found supportive evidence for the model in the data.

Yifan Zhang‘s paper investigates the impacts of trade liberalization on household behavior and other outcomes in urban China resulting from that country’s entry to the WTO in 2001.  The identification strategy employed in the paper exploits regional variation in the exposure to the resulting tariff cuts.  The paper finds that workers in regions initially specialized in industries facing larger tariff cuts experienced relative declines in wages. Households responded to these income shocks in several ways. First, household members were found to work more, especially if they moved into the non-tradable sector. Second, young adults were more likely to live longer in the parental household, and so average household size increased. Third, households tended to save less. These changes in bahavior were interpreted as being motivated by attempts by households to buffer themselves against the negative wage shocks induced by trade liberalization.

There is a long-held view in the trade policy literature that traditional tariff instruments and temporary protection (TP) measures such as anti-dumping and countervailing duties are substitutes. However, David J. Kuenzel argued in his presentation that there is only mixed empirical evidence for a link between tariff reductions and the usage pattern of antidumping, safeguard and countervailing duties. Based on recent theoretical advances, his paper argues that the relevant trade policy margin for implementing TP measures is instead the difference between WTO bound and applied tariffs, or ‘tariff overhang’ as it is often known. Lower tariff overhangs constrain countries’ abilities to raise their MFN applied rates without legal repercussions, independent of past tariff changes. Using detailed sectoral data for a sample of 30 WTO member countries during the period 1996-2014, Kuenzel finds strong evidence for an inverse link between tariff overhangs and TP activity. This result implies that tariff overhangs and TP measures are substitutes.  Based on this finding, he argues that this indicates the importance of existing tariff commitments as a key determinant of alternative TP instruments.

Bibliography of Papers Presented with Links Where Available (Presenters’ Names Shown in Bold)

Abeberese, A.B., P. Barnwal, R. Chaurey, and P. Mukherjee “Firms Under Dictatorship and Democracy: Evidence from Indonesia’s Democratic Transition.”

Aisbett, E., and M. Silberberger “Tariff Liberalisation and Protective Product Standards.”

Antràs, P., T.C. Fort and F. Tintelnot, “The Margins of Global Courcing: Theory and Evidence from US Firms.

Antràs, P., and A. de Gortari, “On the Geography of Global Value Chains.

Abeberese, A.B., P. Barnwal, R. Chaurey, and P. Mukherjee, “Firms under Dictatorship and Democracy: Evidence from Indonesia’s Democratic Transition.”

Baccini, L., H. Cheng, K. Gawande, and H. Jo, “The Political Economy of Trade Agreements: A Test of a Theory.”

Behzadan, N., and R. ChisikThe Paradox of Transfers: Distribution and the Dutch

Brunel, C., and T. ZylkinDo Cross-Border Patents Promote Trade?

Dai, M., W. Huang, and Y. Zhang,How Do Households Adjust to Trade Liberalization? Evidence from China’s WTO Accession.

DeRemer, D.R., “The Principle of Reciprocity in the 21st Century: New Predictions for Trade Agreement Outcomes.

Gawande, K., and B. Zissimos,How Dictators Forestall Democratization Using International Trade Policy.”

Herkenhoff, P., and S. Krautheim, The International Organization of Production in the Regulatory Void.

Kuenzel, D.J., WTO Tariff Commitments and Temporary Protection: Complements or Substitutes?

Leblebicioglu, A., and A. Weinberger, “Openness and Factor Shares: Is Globalization Always Bad for Labor?”

Machiavello, R., and M. Florensa, “Improving Export Quality and What Else? Nespresso in Colombia.”

Marchand, B.U.,Inequality and Trade Policy: Pro-Poor Bias of India’s Contemporary Trade Restrictions.”

Pavcnik, N., “The Impact of Trade on Inequality in Developing Countries.”

Saggi, K., W.F. Wong, and H.M. Yildiz, “Preferential Trade Agreements and Rules of the Multilateral Trading System.”

Schmidt, J., and W. Steingress, “No Double Standards: Quantifying the Impact of the Standard Harmonization on Trade.”

Xu, M., “Riding on the New Silk Road: Quantifying the Welfare Gain from High-Speed Railways.”

Self-Enforcing Trade Agreements and Lobbying

By Kristy Buzard (Syracuse University)

Going back to the mid-1980s, the repeated prisoner’s dilemma has been used to model the absence of strong external enforcement mechanisms for trade agreements.[1] Cooperation is enforced by promises of future punishment for any deviation from the agreement, and the amount of cooperation that can be achieved depends on the severity of the chosen punishments. The strongest incentive-compatible punishment is often the grim trigger strategy in which all players play the static Nash equilibrium forever when any of them defects.

More recent work shows that grim trigger punishments can be improved upon in some circumstances. Jee-Hyeong Park, for instance, has demonstrated that the presence of asymmetric information and imperfect monitoring can make it more efficient to choose shorter punishments.[2] In a similar setting, Alberto Martin and Wouter Vergote show that retaliation — i.e. delayed punishment — dominates reciprocity.[3]

In a recent paper, I identify a different rationale for limiting punishments: endogenous politics.[4] This paper is the first to incorporate endogenous lobbying along the lines of the classic Grossman-Helpman “Protection for Sale” model — the standard model for endogenizing politics in trade policy — into a repeated-game setting. In place of a unitary government, this model has two branches of government who share policy-making power.[5] By endogenizing the political economy weights, one can address questions about the commitment value of trade agreements, and examine the implications of self-enforcement constraints for the design of trade agreements.

I assume that the social-welfare maximizing executives of two countries choose trade agreement tariffs that must then be implemented by politically-susceptible legislatures.[6] For simplicity, only the import-competing industry is represented by a lobby. The weight the legislature puts on the import-competing industry’s profits increases in lobbying effort, which can be thought of as including campaign contributions as well as broader measures of lobbying activity. The lobby will choose its effort level to optimally influence the legislature’s decisions about whether to abide by the trade agreement and how to set tariffs in the absence of an agreement. Assuming there is no uncertainty about the effect of lobbying effort on the outcome of the political process, the lobby either exerts the minimum effort needed to derail the agreement or exerts no effort at all. The executives maximize social welfare by choosing the lowest tariffs that make it unattractive for the lobbies to provoke the legislature to violate the trade agreement. There will thus be no trade disputes in equilibrium, but the out-of-equilibrium threat that a lobby might provoke one is crucial in determining the equilibrium trade agreement structure.

Adding a lobby to the usual repeated-game model adds a new constraint. The constraint on the legislature is loosened by an exogenous increase in the length of the punishment: defections become relatively more unattractive as the punishment becomes more severe as in the standard prisoner’s dilemma. However, the new constraint due to the presence of lobbying becomes tighter because the lobby prefers punishment periods. The higher tariffs during punishment periods give the lobby increased incentive to exert effort as the punishment lengthens. In the face of this heightened lobbying incentive, the executives must raise the trade agreement tariff to avoid a trade dispute.

The optimal Nash-reversion punishment strikes a balance between these two competing forces, so adding endogenous politics suggests an optimal length for punishments: it is  finite for most values of the political weighting function and can be derived directly from the players’ incentive constraints.[7] Shortening the punishment in models with uncertainty serves to increase welfare by minimizing time spent in punishment periods. Since there is no uncertainty in this model, the players remain in the cooperative state in all periods.[8] Here, social welfare improves because shorter punishments weaken the lobby’s incentive to exert effort and this allows the executives to reduce the trade agreement tariffs.

For a given punishment length, increases in the patience of the legislature mean the lobby must exert more effort to induce the legislature to endure the punishment. The executive can thus reduce trade agreement tariffs without fear that the agreement will be broken. Increases in the lobby’s patience and the lobby’s ability to influence the legislature (as measured by the political weighting function) work in the opposite direction: they allow the lobby to exert less effort to provoke a trade dispute, and therefore higher equilibrium trade agreement tariffs are necessary to avoid a dispute.

The optimal punishment length itself also depends on how readily special interests are able to influence the political process. If the lobby is weak, the optimal punishment converges to that of the model without a lobby: longer punishments are better because the key constraint is the legislature’s. As the lobby becomes more influential, the optimal punishment becomes shorter because the lobby’s incentive becomes more important. That the optimal length of punishments is a function of the influence of the lobbies reinforces the idea that endogenizing politics can be critically important for institutional design questions.


Bagwell, K., and R.W. Staiger, (2005); “Enforcement, Private Political Pressure, and the General Agreement on Tariffs and Trade/World Trade Organization Escape Clause.Journal of Legal Studies, 34(2): 471–513.

Buzard, K., (2017a); “Self-Enforcing Trade Agreements and Lobbying.Journal of International Economics, 108(1): 226–242.

Buzard, K., (2017b); “Trade Agreements in the Shadow of Lobbying.” Review of International Economics, 25(1): 21–43.

Dixit, A., (1987); “Strategic Aspects of Trade Policy.” in: T.F. Bewley (ed.), Advances in Economic Theory: Fifth World Congress. Cambridge University Press, pp. 329–362.

Maggi, G., and A. Rodríguez-Clare, (2007); “A Political-Economy Theory of Trade Agreements.” The American Economic Review, 97(4): 1374–1406.

Martin, A., and W. Vergote, (2008); “On the Role of Retaliation in Trade Agreements.” Journal of International Economics, 76(1): 61–77.

Milner, H.V., and B.P. Rosendorff, (1997); “Democratic Politics and International Trade Negotiations: Elections and Divided Government as Constraints on Trade Liberalization.” Journal of Conflict Resolution, 41(1): 117–146.

Park, J.-H., (2011); “Enforcing International Trade Agreements with Imperfect Private Monitoring.” Review of Economic Studies, 78(3): 1102–1134.


[1] See for example Dixit (1987).

[2] Park (2011).

[3] Martin and Vergote (2008).

[4] Buzard (2017a).

[5] This approach follows Milner and Rosendorff (1997).

[6] The model admits an interpretation in which the same branch of government both negotiates the trade agreement and decides on the applied tariff ex-post, and thus the one-shot game shares much in common with Maggi and Rodríguez-Clare (2007).

[7] In Park (2011), the finite punishment length is due to imperfect monitoring and/or uncertainty.

[8] In Buzard (2017b), I show how uncertainty can be incorporated into this model.

Global Tariff Negotiations as a Stumbling Bloc to Global Free Trade?

By James Lake (Southern Methodist University) and Santanu Roy (Southern Methodist University)

The principle of non-discrimination lies at the heart of the WTO. GATT Article I mandates that, for a given product, a country cannot set different tariffs on different trading partners. Indeed, GATT Article I has provided the bedrock for the various rounds of global trade negotiations, including the 1994 Uruguay Round. However, GATT Article XXIV allows Free Trade Agreements (FTAs) whereby members eliminate tariffs on each other while maintaining tariffs on non-members. Thus, FTAs directly contradict the non-discrimination principle. In turn, an important and long standing issue in the FTA literature is whether FTAs help or hinder global trade negotiations. In the famous language of Jagdish Bhagwati, are PTAs “building blocs” or “stumbling blocs” to global trade liberalization?

A long literature has tackled Bhagwati’s question.[1] However, the interdependence between FTAs and global trade negotiations need not only run from FTAs to global negotiations. The process of global negotiations may also impact the process of FTA formation and, in turn, the degree of global trade liberalization. That is, the tariff concessions embedded in the Uruguay Round may have shaped the subsequent process of FTA formation and, in turn, the ultimate degree of global trade liberalization. Yet, as noted by Caroline Freund and Emanuel Ornelas in their review of the literature, the impact of global negotiations on FTAs has received surprisingly little attention in the literature.[2]

In a recent paper, we investigate how an initial round of global negotiations over tariff bindings (i.e. the upper bound on tariffs) impact the subsequent process of FTA formation in a three-country world where governments favor the interests of their import competing sector due to political economy motivations.[3] To do so, we compare the outcomes of two extensive form games that differ only because of the presence or absence of an initial round of global tariff negotiations. In the first game, global negotiations precede FTA negotiations and forward looking governments anticipate the possibility of FTA formation during global negotiations. In the second game, there are no global negotiations preceding FTA negotiations. In either game, FTA negotiations take place sequentially through a randomly chosen order. This framework generates interesting insights.

Our main result is that, when political economy motivations are not too strong, global tariff negotiations actually prevent global free trade. When global tariff negotiations precede FTA negotiations, a tariff ridden world emerges with globally negotiated tariff bindings above zero and no more than one pair of countries linked by an FTA. However, in the absence of global tariff negotiations, FTA formation continues until global free trade is attained via all pairs of countries linked through FTAs. Thus, global tariff negotiations are the cause of a world stuck short of global free trade. In other words, global tariff negotiations are a stumbling bloc to global free trade!

The driving force behind our main result is the different level of tariff concessions given by the eventual FTA non-member in the presence and absence of global tariff negotiations. In the absence of global tariff negotiations, the FTA non-member has no pre-existing tariff bindings. To gain tariff concessions from the outsider, FTA members have strong incentives to form subsequent FTAs with the non-member. Indeed, as long as government political economy motivations are not too strong, sequential FTA formation leads to global free trade. However, global negotiations produce significant tariff binding concessions by all countries before FTA negotiations. These tariff concessions obtained through forward looking global negotiations are deep enough that, upon FTA formation, FTA members no longer have any incentive for FTA formation with the non-member and global free trade does not emerge. In this sense, the success of global tariff negotiations in lowering tariffs drives our result that global tariff negotiations prevent global free trade.

From a practical standpoint, our analysis explains how globally negotiated tariffs depend on anticipations regarding future FTA formation and how binding overhang and tariff complementarity depend on political economy motivations.[4] Indeed, our analysis can shed light on the different empirical results of Antoni Estevadeordal, Caroline Freund and Emanuel Ornelas versus Nuno Limao and Baybars Karacaovali.[5] The former find empirical evidence for tariff complementarity among South American FTA members (i.e. FTA members choose to lower their tariffs on non-members after FTA formation). However, the latter find no evidence that preferential tariff liberalization begets multilateral tariff liberalization for the US and the EU. Our theoretical results suggest the former (latter) should emerge among governments with relatively strong (weak) political economy motivations. Indeed, these predictions based on political economy motivations square well with the recent cross-country empirical estimates of political economy motivations by Kishore Gawande, Pravin Krishna and Marcelo Olarreaga.[6]


Estevadeordal, A., C. Freund, and E. Ornelas (2008); “Does Regionalism Affect Trade Liberalization Toward Nonmembers?” Quarterly Journal of Economics 123(4): 1531-1575.

Freund, C. (2000); “Multilateralism and the Endogenous Formation of Preferential Trade Agreements.Journal of International Economics 52 (2): 359-376.

Freund, C. and E. Ornelas (2010); “Regional Trade Agreements.Annual Review of Economics 2(1): 139-166.

Gawande, K., P. Krishna, and M. Olarreaga (2012): “Lobbying Competition over Trade Policy.International Economic Review 53 (1), 115-132.

Karacaovali, B. and N. Limão (2008); “The Clash of Liberalizations: Preferential vs. Multilateral Trade Liberalization in the European Union.Journal of International Economics 74(2): 299-327.

Krishna, P. (1998); “Regionalism and Multilateralism: A Political Economy Approach.Quarterly Journal of Economics 113(1): 227-251.

Lake, J. and S. Roy (2017); “Are Global Trade Negotiations Behind a Fragmented World of Gated Globalization?Journal of International Economics 108, 117-136.

Limão, N. (2006); “Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the United States.American Economic Review 96(3): 896-914.

Ornelas, E. (2005a). “Endogenous Free Trade Agreements and the Multilateral Trading System.Journal of International Economics 67(2): 471-497.

Ornelas, E. (2005b); “Trade Creating Free Trade Areas and the Undermining of Multilateralism.European Economic Review 49 (7): 1717-1735.


[1] Some influential contributions include Krishna (1998), Riezman (1999), Ornelas (2005a,b) and Saggi and Yildiz (2010).

[2] See Freund and Ornelas (2008) for two exceptions, and see Freund and Ornelas (2010) for their review of the literature.

[3] In our paper Lake and Roy (2017), we model global tariff negotiations over tariff bindings because countries negotiate over tariff bindings rather than the actual tariffs (i.e. applied tariffs) in practice.

[4] Binding overhang is the difference between the tariff binding and the actual tariff set by a country. Tariff complementarity is the phenomenon where, upon FTA formation, the FTA members choose to lower their tariffs on non-members.

[5] Estevadeordal et. al. (2008), Limao (2006) and Karacaovali and Limao (2008).

[6] Gawande, Krishna and Olarreaga (2012).


The GATT/WTO’s Special and Differential Treatment of Developing Countries

By Ben Zissimos (University of Exeter Business School)

Special and differential treatment (SDT) is effectively a set of exemptions from MFN extended to developing country members of the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO).[1]  (MFN (most favored nation) treatment is the principle that any terms agreed between two parties to a trade agreement will automatically be extended to all others, and is a central pillar of the GATT/WTO).  SDT has two components: an access component, whereby developing countries are granted access to developed country markets, and a ‘right to protect’ component, whereby they do not have to reciprocate market access concessions that the developed countries make.  The intellectual underpinnings of SDT were: (i) that under the Gold Standard poor countries would tend to suffer from balance of payments problems that could be remedied through protection; (ii) the Prebisch-Singer thesis that developing countries would face secular decline in their terms of trade, which could be remedied by preferential access to developed country markets; and (iii) by the logic of infant industry protection, whereby fledgling industries need an initial period of protection to grow in a secure domestic market, before eventually competing abroad.  Ironically, there was no SDT during the 1950s-60s when the research community was broadly sympathetic to the idea that development can benefit from protectionism.  SDT measures were formally adopted mainly in the Tokyo Round that took place in the 1970s, right around the time that the research community was beginning to argue that development should be supported by outward-looking trade regimes to enhance economic efficiency.[2]

As a result of this history, there is an awkward mismatch between what mainstream economics would prescribe, an outward oriented development strategy, and the protectionism that is allowed for under SDT.  According to one mainstream view, a trade agreement enables countries to escape from a terms-of-trade driven prisoner’s dilemma, whereby they have a collective incentive to liberalize trade to maximize efficiency globally but an individual incentive to adopt protection in order to improve their terms of trade.  Accordingly, the benefits to a trade agreement are based on the exchange of balanced concessions.  So developing countries are currently hurt by high protection of agriculture in developed countries because, under SDT, developing countries have not come to the table offering balanced concessions of their own.  Under this view, developing countries should eschew SDT.  A second view holds that the purpose of a trade agreement is to enable governments to tie their hands against protectionist interests in their own countries.  In line with this view, many developing countries have cited commitment to openness against protectionist interests at home as the main reason why they wanted to become members of the WTO.  Here again, the aim would seem to be to eschew the kinds of protectionist measures allowed by SDT.  So a basic recommendation from mainstream economic research would be that while trade agreements under the WTO have a role to play in economic development, SDT may in fact be inimical to the development process.[3]

Several recent papers have called into question key elements of the arguments on which the above basic recommendation rests.  For example, a key implication of the terms-of-trade motivation for a trade agreement is that, if developing countries do not make any concessions of their own while developed countries do, the terms of trade will adjust to ensure that trade flows will not change at all for developing countries.  Consequently they cannot gain from any market access concessions that developed countries make.  Yet careful econometric research has found evidence (though not yet fully conclusive) that developing country exports have increased significantly for trade agreements involving SDT.  However, it is not yet clear what the basis is for this increase.  Has the surge in exports facilitated scale gains that could underpin an export-led growth strategy?  Or has it only allowed exporters to collect rents as the terms of trade adjust?[4]  A different line of research suggests that under the commitment-based motivation for a trade agreement, liberalization by a developing country must be delayed relative to a developed country if it is to be incentive compatible.  This would provide motivation for the use of SDT measures as support for phased liberalization by developing countries, akin to how they were used in the Uruguay Round, rather than using them as the basis for an outright exemption from liberalization.[5]  There appears to be a significant opportunity both to further our understanding of the effects of SDT in past trade agreements and to assess the role that it should play (if any) in future development strategies.


Bagwell, K., C.P. Bown, and R.W. Staiger, (2016); “Is the WTO passé?” Journal of Economic Literature 54 (4): 1125-1231. [Working paper version]

Bagwell, K., and R.W. Staiger, (2014) “Can the Doha Round be a Development Round? Setting a Place at the Table.” Published in R.C. Feenstra and A.M. Taylor (eds.), Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century, NBER, University of Chicago Press, 2014, 91-124. [Working paper version]

Conconi, P., and C. Perroni, (2012); “Conditional versus Unconditional Trade Concessions for Developing Countries.” Canadian Journal of Economics 45, 613-631. [Working paper version]

Conconi, P., and C. Perroni, (2015); “Special and Differential Treatment of Developing Countries in the WTO.” World Trade Review 14, 67-86. [Working paper version]

Gil-Pareja, S., R. Llorca-Vivero, and J.A. Martínez-Serrano (2014); “Do Nonreciprocal Preferential Trade Agreements Increase Beneficiaries’ Exports?” Journal of Development Economics 107, 291-304.

Little, I.M.D., T. Scitovsky, and M. Scott, (1970); Industry and Trade in some Developing Countries: A Comparative Study, London: Oxford University Press, for the Organization of Economic Cooperation and Development.

Ornelas, E., (2016); “Special and Differential Treatment for Developing Countries.” Chapter 7 in K. Bagwell & R. W. Staiger (eds.), Handbook of Commercial Policy, Elsevier/North Holland, Volume 1B:  369-432. [Working paper version]

Whalley, J., (1999); “Special and Differential Treatment in the Millennium Round.” World Economy, 22(8): 1065-1093. [Working paper version]

[1] This piece summarizes background research for a book that I am editing, titled The WTO and Economic Development.

[2] Whalley (1999) provides an excellent historical discussion of the origins of SDT, together with details of each of the relevant GATT Articles in which it is codified and when each was introduced.  He also provides a detailed discussion of the intellectual underpinnings. Little, Scitovsky and Scott (1970) were particularly influential in turning the tide toward outward oriented development strategies.

[3] See Bagwell, Bown and Staiger (2016) for a comprehensive review of the literature on the purpose of trade agreements under the GATT/WTO.  Bagwell and Staiger (2014) argue that, by the terms-of-trade motive, developing countries cannot benefit (nor loose) from multilateral trade agreements if they fail to make concessions under SDT because the volume of their trade does not change.

[4] See Gil-Pareja, Llorca-Vivero and Martinez-Serrano (2014) and the references therein for details.  See Ornelas (2016) for an excellent overview of the theoretical and econometric literature on SDT.

[5] See Conconi and Perroni (2012, 2015) for specific details, as well as the discussion by Ornelas (2016).