Political economy is a particularly useful approach to studying the process of trade negotiations or the design of international trade institutions. A Stockholm workshop on `Political Economy of Trade Negotiations', held at the Institute for International Economic Studies on 1/2 October, brought together leading researchers in this field. The workshop was organized by L Alan Winters, Professor of Economics and Head of Department at the University of Birmingham and Co-Director of CEPR's International Trade programme, and Torsten Persson, Professor of Economics at the Institute for International Economic Studies, Stockholm, and Research Fellow in CEPR's International Macroeconomics programme. The workshop formed part of CEPR's research initiative on `Market Integration, Regionalism and the Global Economy', supported by the Ford Foundation. The papers presented considered two main areas: the impact of regional integration on multilateral free trade and the effects of lobbying on trade policies in political equilibrium.

In the first paper, `Asymmetric Lobbying Effects: Why Governments Pick Losers', Richard Baldwin (Graduate Institute of International Studies, Geneva, and CEPR) developed a political equilibrium model in which industries spend money on lobbying to obtain profit-boosting protection. Sunk costs imply that when declining industries lobby they are aiming to bring rates of return back to normal levels, which they may do without attracting entry. Expanding industries, on the other hand, would have to lobby for supernormal profits, which may then be diluted by new entry. This suggests that governments will tend to pick losers because this asymmetry causes them to lobby more strongly than winners.

Magnus Blomström (Stockholm School of Economics and CEPR) pointed out that the model does not explain why expanding high-tech industries lobby for R&D support. Michael Finger (World Bank) suggested that this is because winners and losers lobby in different ways.

In a joint paper with Elhanan Helpman, `Political Economy of Free Trade Agreements', Gene Grossman (Princeton University and CEPR) explored the creation of free trade areas (FTAs) in a model in which domestic interest groups make political contributions in order to influence government policy. Analysis of the determinants of political contributions of various interest groups reveals that lobbies that stand to lose most from failure to capture protection must contribute the largest sums to ensure they receive it. The extent of competition among rival interest groups determines their preferences among policy regimes; with intense competition among the lobbies, they prefer the government's means of transferring income to be ineffective and may even try to constrain the set of policy instruments available to it. In contrast, when their interests do not conflict, lobbies will favour the most effective means of redistribution and seek to extract gains at the expense of the unrepresented masses. An FTA can provide `enhanced protection' to producers that capture partners' markets previously served by third countries. Incentives to lobby for such trade-diverting FTAs are typically the strongest, since they raise profits at the expense of consumers and taxpayers with no offsetting loss to partner producers.

Torsten Persson objected that domestic voters and lobbyists are mostly on the same side and noted that differences in countries' initial tariff structures could affect lobbying for protection and the formation of FTAs. Where there are both high- and low-tariff countries, exporters in the latter have incentives to engage in cross-border lobbying for free trade.

In a joint paper with Kyle Bagwell, `Multilateral Tariff Cooperation During the Formation of Regional Free Trade Areas', Robert Staiger (Stanford University) explored the impact of the formation of FTAs and customs unions on countries' ability to maintain low cooperative multilateral tariffs. For a repeated prisoners' dilemma game in which the cooperative equilibrium represented the lowest sustainable tariffs, their results suggested that these increase temporarily during the transition period when the negotiations concerning the FTA are taking place. During the negotiations to form a customs union, in contrast, the lowest sustainable tariffs decrease, but pressures to raise the tariffs reappear once the union becomes established.

Mika Widgrén (Research Institute of the Finnish Economy) suggested enriching the model by relaxing its assumption that the world is stationary during the final phase and also stressed the importance of institutional factors in capturing the kinds of decisions customs unions make for the modelling of their policies. André Sapir (ECARE, Université Libre de Bruxelles, and CEPR) asked about the model's prediction concerning the creation of the NAFTA.

In a joint paper with L Alan Winters and Constantinos Syropoulos, `Implications of European Integration for Transatlantic Cooperation in Trade', Eric Bond (Pennsylvania State University) used a three-country repeated game model to analyse the effects of a customs union's formation on trade relations with non-members. The results suggested that the formation of a customs union by two of the three countries enhances their incentives to deviate from free trade. Since the non-member country is induced to behave less aggressively in the face of customs union, the net effect of integration could be either to raise or to reduce tariffs on intra-bloc trade flows.

Konstantine Gatsios (Athens University of Economics and Business and CEPR) objected that there is nothing to ensure that countries choose cooperative strategies in a repeated tariff game. He also questioned the usefulness of trigger strategies when free trade is not a Pareto-superior outcome.

In `The New Regionalism and Trade Policy: Some Political Economy with an East Asian Perspective', Andrew Hughes Hallett (Strathclyde University and CEPR) considered the benefits of forming an East Asian trading zone, but his principal focus was on whether a movement towards such a bloc poses any threat to GATT arrangements and what the motivating forces of this movement to regional blocs might be. He argued that cooperative trade policies are most likely to provide a welfare-maximizing regime and that analysis of the likelihood of bloc formation requires an examination of investment flows as well as trade flows, while its political economy may be modelled using a framework of simultaneous/overlapping games. Mutual commitments to maintain a trade policy regime are also more credible within a regional bloc than at the global level.

Michael Finger welcomed the suggestion to examine investment flows but asked whether governments or producers are the actors in this model. Consistency with the GATT is not relevant to the negotiation of regional agreements, and countries outside such blocs are only interested in securing their own market access; he was rather sceptical concerning the possible formation of an Asian bloc.

In a joint paper with Flavio Delbono and Marco Mariotti, `Why the Uruguay Round Is More Difficult to Negotiate than Previous GATT Rounds', Giorgio Basevi (Università degli Studi di Bologna and CEPR) focused on the effects of the evolution of the EC on the GATT negotiations. In a bargaining model with two asymmetric EC countries and the US, `Germany' is primarily interested in US acceptance of the EC's joint offer, while `France' seeks to minimize the liberalization entailed in the offer. While France is relatively powerful, it is content to fix the joint EC offer to maximize joint Franco-German pay-offs, but as Germany becomes more powerful and keener to reach agreement, France becomes less cooperative and the EC offer becomes less attractive to the US.
André Sapir commended the analysis for taking account of the asymmetries among the EC countries. Mika Widgrén suggested modelling the EC's internal decision-making more carefully by taking account of member countries' relative weights and different policy positions. Andrew Hughes Hallett and Robert Staiger noted that growing asymmetries within the Community have made it more difficult for the EC to make low tariff offers.

In a joint paper with Petros Mavroidis, `Competition, Competition Policy and the GATT', Bernard Hoekman (World Bank and CEPR) argued that further moves to liberalize trade and implement existing GATT disciplines may have a greater impact on global competition than the deliberate pursuit of harmonized multilateral competition policy rules. Current GATT rules also allow both the application and non-application of the contracting parties' existing domestic competition laws to be challenged in cases where this leads to de facto discrimination between foreign and domestic products.

L Alan Winters stressed that the best competition policy is open borders, which is consistent with the GATT. Countries that have genuine disagreements about optimal competition policy may wish to maintain their own competition policies, however, even if the GATT adopts an international standard. This will make the incorporation of competition policy into the GATT very difficult. Torsten Persson noted that common policy instruments require the establishment of centralized enforcement mechanisms, which is not a goal of the GATT.