Beyond Economics: Estimating the Political Gains from Trade Agreements

What are the political gains from trade agreements and what is their economic value in turn?

Project Summary

The current round of multilateral trade negotiations in the World Trade Organisation (WTO) seems to have stalled. Observers and researchers have noted that part of the reason is that the economic gains to be made from the current round of negotiations are relatively low after the previous eight rounds of GATT and WTO negotiations.

However, these claims are made based on economic gains from trade liberalization through their impact on import and export flows. However, political gains from trade agreements, associated with problems of credibility, signalling, and insurance can have a very significant economic value that has been neglected by studies and analysis so far. This research project provided an estimate of the economic importance of those political gains from trade agreements.

Academic Output

Working Paper

Weak Governments and Trade Agreements

The recent theoretical literature on the determinants of trade agreements has stressed the importance of political gains, such as credibility, as a rationale for trade agreements. The empirical literature, however, has lagged behind in the estimation of the economic gains or losses associated with these politically motivated trade agreements. This paper fills that gap by providing estimates of the economic impact of politically and economically motivated trade agreements. We find that credibility gains play a role in increasing the probability of two countries signing an agreement. Moreover, agreements with a stronger political motivation are more trade creating than agreements that are signed for pure market access / economic reasons.

Working Paper

Does Regionalism Reduce the Volatility of Trade Policy?

The objective of this paper is to evaluate the extend to which trade agreements affect agricultural trade policy volatility. Using a new panel database compiled as part of the World Bank’s Agricultural Distortions research project, we estimate the effect of regionalism (proxied in various ways) on the volatility of price distortions measured by the absolute value of their first differences, averaged, for each country and year, over all agricultural goods. Using an instrumental-variable approach to correct for the endogeneity of regional trade agreements, (RTAs), we find that participation in RTAs has a significantly negative effect on agricultural trade-policy volatility. We find that the WTO’s agricultural agreement also contributed to reducing agricultural trade-policy volatility, in spite of the weak disciplines involved, but the effect is only weakly identified. Our results are robust to a variety of robustness checks and hold, in particular, for the Latin American sub-sample.

Working Paper

Smoke in the Water

As the economic crisis deepens and widens, fears of a return to the protectionist spiral of the 1930s become more common. However, an important difference between the 1930s and today is the existence of the World Trade Organization and the legal limits it imposes on the protectionist responses members can pursue. The objective of this paper is threefold. First, to assess the extent to which applied tariff can legally be raised without violating tariff-bound obligations, and compare it with what is economically possible. Second, to examine what has been the protectionist response of individual countries when facing an economic crisis since the creation of the WTO. Finally, to predict how far the protectionist responses will go during the current crisis. Results suggest that the policy space left when looking at what is economically possible is indeed quite large. However, in the recent past very little of the available policy space has been used by countries suffering from an economic crisis. Our predictions for the current crisis are modest tariff hikes in the order of 8 percent.

Executive Summary

The current round of multilateral trade negotiations in the World Trade Organization seem to has stalled. Observers and researchers have noted that part of the reason is that the economic gains to be made from the current round of negotiations are relatively low after the previous eight rounds of GATT and WTO negotiations. But these claims are made based on economic gains from trade liberalization through their impact on import and export flows. In this project we move beyond pure economic gains to consider the gains that trade agreements could bring in the presence of credibility problems or uncertainty. The project includes three working papers. In the first paper we explored the credibility rationale for signing trade agreements. We found that governments that are relatively weak in terms of bargaining power when facing interest groups, and that give intermediary values to social welfare in their objective function are more likely to sign trade agreements for credibility reasons. These trade agreements are also more trade-creating than agreements that are signed for other reasons. In the second paper we explored the extent to which trade agreements help reduce trade policy volatility. We focus on agricultural trade policy because it is notoriously volatile. We found that trade agreements help reduce agricultural trade-policy volatility. We also found that the WTO’s agricultural agreement also contributed to reducing agricultural trade-policy volatility, in spite of the weak disciplines involved, but the effect is weak. Finally, in a third paper we examined the role played by GATT’s tariff binding in limiting the protectionist response during economic crisis. We found that tariff bounds today could allow in most countries, particularly in the developing world, for a very large protectionist response to economic crisis, but this flexibility allowed by the system has rarely been used.

Research Team

Marcelo Olarreaga
Coordinator
University of Geneva

Olivier Cadot
Principal Member

Alessandro Nicita
Principal Member

Status

completed

Disciplines

Themes

Regions

Host Institution

Coordinator

Year