DP9301 Uncertainty and Trade Agreements
Author(s): | Nuno Limão, Giovanni Maggi |
Publication Date: | January 2013 |
Keyword(s): | Agreements, Investment, Policy Uncertainty, Trade |
JEL(s): | F1, F13, F5, F6, O19 |
Programme Areas: | International Trade and Regional Economics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=9301 |
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