Uncertainty and Trade Agreements

Giovanni Maggi and Limão, Nuno
Authors registered in the RePEc Author Service: Nuno M. Limão

No 9301, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we explore the potential gains that a trade agreement (TA) can provide by regulating trade-policy uncertainty, in addition to the more standard gains from reducing the mean levels of trade barriers. We show that in a standard trade model with income-risk neutrality there tends to be an uncertainty-increasing motive for a TA. With income-risk aversion, on the other hand, the uncertainty-managing motive for a TA is determined by interesting trade-offs. For a given degree of risk aversion, an uncertainty-reducing motive for a TA is more likely to be present when the economy is more open, the export supply elasticity is lower and the economy is more specialized. Governments have stronger incentives to sign a TA when the trading environment is more uncertain. As exogenous trade costs decline, the gains from decreasing trade-policy uncertainty tend to become more important relative to the gains from reducing average trade barriers. We also derive simple

Keywords: Agreements; investment; Policy uncertainty; Trade (search for similar items in EconPapers)
JEL-codes: F1 F13 F5 F6 O19 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Uncertainty and Trade Agreements (2015)
Working Paper: Uncertainty and Trade Agreements (2013)
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