Conditional versus Unconditional Trade Concessions for Developing Countries

Carlo Perroni and Paola Conconi

No 8253, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We consider a small open economy that faces a commitment problem in trade liberalization. We examine how the relationship with a large trading partner affects the ability of the small countrys government to sustain free trade through a reputational mechanism. If the small country's government is patient enough, it can overcome its domestic commitment without the help of the large country. Unconditional liberalization by the large trading partner has an ambiguous effect on the small country's dynamic incentives. Liberalization through a reciprocal trade agreement, in which the large country lowers its tariffs conditionally on the small country doing the same, unambiguously dominates unconditional liberalization by the large country as a way of boosting trade reforms and reinforcing policy credibility in the small country. However, if capacity in the import-competing sector can only be reduced gradually, a conditional, reciprocal agreement may require an asynchronous exchange of concessions, with the large country liberalizing before the small country.

Keywords: Commitment; Conditionality; Developing countries; Trade concessions (search for similar items in EconPapers)
JEL-codes: D72 D78 F13 (search for similar items in EconPapers)
Date: 2011-02
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Conditional versus unconditional trade concessions for developing countries (2012)
Journal Article: Conditional versus unconditional trade concessions for developing countries (2012)
Working Paper: Conditional versus Unconditional Trade Concessions for Developing Countries (2012)
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