Governments negotiating bilateral or regional trade arrangements are subject to political pressures that have received much less attention from economists than the simple gains and losses that result from the conclusion of such agreements. In Discussion Paper No. 908, Research Fellows Gene Grossman and Elhanan Helpman identify the conditions under which it will be politically viable for two governments to form a free trade agreement and the form it will take. They extend their earlier models of interactions between special interests and a government that also represents the average voter and of the domestic political competition and subsequent international negotiations that determine equilibrium tariff schedules. The major battles over individual tariffs are between individual industries in the two countries, while those over free trade agreements are fought between all export and import-competing interests within each country.

Grossman and Helpman find that each government will endorse an FTA that fully liberalizes trade if it either generates substantial welfare gains for the average voter and adversely affected interests are too poorly coordinated to block it or creates gains for exporters that exceed such losses and any political cost of a reduction in the average voter's welfare. An agreement is more likely to secure the assent of both countries when their potential trade gains roughly balance and when exporters' gains from a partner country's high domestic prices outweigh import-competitors' losses from any fall in domestic prices. The conditions that enhance the viability of a potential agreement therefore also raise the likelihood that it will reduce aggregate welfare. Excluding some `sensitive' sectors or at least granting them long periods of adjustment may also enable governments to diffuse opposition to an FTA and reduce the political costs of its conclusion. This formal analysis can easily be extended to allow greater asymmetry within groups of potential exporters and import-competitors. Industries will then be granted on the basis of the `comparative political advantage', ranked in terms of the costs and benefits of their inclusion to the governments of the import-competing and exporting countries respectively.

The Politics of Free Trade Agreements
Gene M Grossman and Elhanan Helpman

Discussion Paper No. 908, January 1994 (IT)