DP5321 A Political-Economy Theory of Trade Agreements

Author(s): Giovanni Maggi, Andres Rodriguez-Clare
Publication Date: October 2005
Keyword(s): domestic commitment, lobbying, trade agreements
JEL(s): D72, F13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5321

We develop a model where trade agreements - in addition to correcting terms-of-trade externalities - help governments to commit vis-a-vis domestic industrial lobbies. We explore how trade liberalization is affected by the characteristics of the political environment, such as the degree to which governments are politically motivated and the influence of lobbies during the negotiation of the agreement. We find that governments may prefer to commit to tariff ceilings, rather than exact tariff levels. We also find that trade liberalization is deeper when capital is more mobile across sectors. In a dynamic extension of the model, the optimal agreement entails an immediate slashing of tariffs followed by a phase of gradual trade liberalization. In the gradual phase, the speed of liberalization is higher when capital is more mobile.