Size Inequality, Coordination Externalities and International Trade Agreements

Nuno Limão and Kamal Saggi ()

No 13-00013, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: Developing countries now account for a significant fraction of world trade and two thirds of the membership of the World Trade Organization (WTO). However, many are still individually small and thus have a limited ability to bilaterally extract and enforce trade concessions from larger developed economies even though as a group they would be able to do so. We show that this coordination externality generates asymmetric outcomes under agreements that rely on bilateral threats of trade retaliation---such as the WTO---but not under agreements extended to include certain financial instruments. In particular, we find that an extended agreement generates improvements in global efficiency and equity if it includes the exchange of bonds prior to trading but not if it relies solely on ex-post fines. Moreover, a combination of bonds and fines generates similar improvements even if small countries are subject to financial constraints that prevent them from posting bonds.

Keywords: trade agreements; tariffs; bonds; fines. (search for similar items in EconPapers)
JEL-codes: F1 O1 (search for similar items in EconPapers)
Date: 2013-09-08
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (6)

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Related works:
Chapter: Size inequality, coordination externalities and international trade agreements (2018)
Chapter: Size inequality, coordination externalities and international trade agreements (2018)
Journal Article: Size inequality, coordination externalities and international trade agreements (2013)
Working Paper: Size Inequality, Coordination Externalities and International Trade Agreements (2011)
Working Paper: Size Inequality, Coordination Externalities and International Trade Agreements (2011)
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