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A Political-Economy Theory of Trade Agreements

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Abstract:

We present a model where trade agreements are motivated by the desire of governments to commit vis-à-vis domestic lobbies, in addition to standard terms-of-trade externalities. The model predicts that trade liberalization is deeper when capital is more mobile across sectors, and when governments are more politically motivated (provided domestic-commitment motives are strong enough). The model also provides a new rationale for the use of tariff ceilings. In a fully dynamic specification of the model, tariffs are reduced in two stages: an immediate cut and a subsequent gradual reduction, with the speed of liberalization increasing in the degree of capital mobility.

Document Type: Research Article

DOI: http://dx.doi.org/10.1257/000282807783286838

Publication date: September 1, 2007

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