Many attribute the repeated failure of international trade negotiations to achieve efficient and mutually advantageous outcomes to the influence of interest groups. In Discussion Paper No. 747, Research Fellow Bernard Hoekman and Michael Leidy develop a three-stage model of the interplay between interest groups and self-interested negotiators. `Pre-negotiation' sets the agenda; `negotiation' entails intergovernmental bargaining in which interest group lobbying determines negotiators' effective preferences over policy packages; and `post-negotiation' determines the resulting structure. The imperfect correspondence between the policy blueprint and the administrative procedures needed to implement it leaves room for flexibility and hence for interest group pressures.

Hoekman and Leidy find that most trade negotiations are sufficiently complex to ensure that the `vision' that initiates them has little to do with the eventual course of trade policy; both negotiators and interest groups value the non-transparent accommodation of protectionist outcomes, so concessions are largely hidden in the agreements' esoteric details. The social welfare effect of bargaining power is also typically over- or misstated: it promotes negotiators' effective preferences but not necessarily the national interest, so it may be a liability for some countries and an asset to others.
Hoekman and Leidy conclude that the greatest threat to liberalization lies in the tendency to accommodate special interests in the annexes, exceptions, sub-paragraphs, interpretive notes and derogations of such agreements. The debate over whether regional integration agreements (RIAs) are building- or stumbling-blocks in the course of multilateral trade negotiations (MTNs) is therefore misconceived, and it may be more productive to examine how to create institutions that enhance the transparency of both types of agreements. Mobilizing diffuse consumer interests will then make progress towards regional or multilateral liberalization more likely.

In Discussion Paper No. 748, Hoekman and Leidy investigate the common view that RIAs achieve greater liberalization of intra-bloc trade than multilateralism by examining the effects on RIAs of the political economy forces that block far-reaching multilateral liberalization. The literature usually takes the realization of regional blocks' internal liberalization as given and assesses its welfare and external effects. With simultaneous non-discriminatory and preferential liberalization, trade data cannot adequately measure intra-bloc liberalization and must be complemented by policy indicators, such as changes in expected costs of market access. These are affected not only by tariffs and administrative costs but also by continued differing standards, factor immobility, and constraints on governments' abilities to reimpose or increase restrictions in future, which are all very difficult to measure.
Hoekman and Leidy therefore undertake a qualitative assessment of the extent to which the exceptions, sectoral exclusions, quotas and market-sharing arrangements, escape clauses, safeguard provisions, discretion to set and enforce standards and other non-tariff measures embodied in current RIAs among OECD countries liberalize intra-bloc trade beyond the provisions of the GATT. They review the performance of the European Community, EFTA, EC trade agreements with non-members and the CanadaUS and AustraliaNew Zealand free trade agreements to show that their holes and loopholes closely resemble those of the GATT. At any point in time these RIAs achieve little more than the GATT commitments, but this need not imply that they have yielded no benefits since their negotiations have been complemented by and even stimulated further multilateral liberalization. Also, while the holes and loopholes are similar, there are important differences in the agreements themselves: rules of origin tend to make free trade areas costlier than customs unions, but this may be more than compensated if a customs union maintaining instruments of contingent protection ultimately has higher average external protection than a free trade area.

What to Expect from Regional and Multilateral Trade Negotiations: A Public Choice Perspective
Holes and Loopholes in Integration Agreements: History and Prospects
Bernard M Hoekman and Michael P Leidy

Discussion Papers Nos. 747-8, December 1992 (IT)