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Game-Modeling Multilateral Trade Negotiations
Abstract
During the nineties, Europe became a major recipient of FDIs but Italian regions have been largely excluded from this process. Was it due to their characteristics, or were Italian regions “doomed” by a negative country effect? In this paper we address this issue by estimating the determinants of multinational firms’ location choices in 52 EU regions. We find that Italian regions indeed attracted significantly less than their observable potential, and that this could be explained by the inefficiency of the bureaucratic apparatus and of the legal system. The effect of taxes is instead strongly sensitive to the inclusion of agglomeration variables and is asymmetric across regions.
... There are many excellent discussions of the principles and functioning of the GATT, includingBaldwin 1987, Bhagwati 1990a,b, 1991, Finger 1979, Jackson 1989, Jackson and Davey 1986, Patterson 1989, Winters 1990, and Wolf 1987 ...
... The discussion in this section is based especially onBaldwin 1987, Bhagwati 1990a,b, 1992a,b, Finger 1979, Hoekman 1991, Jackson 1989, Krugman 1991b,b, Patterson 1989, Nogues 1990, Schott 1989, Whalley 1991, Winters 1990, Wolf 1987, and Yarbrough and Yarbrough 1986 This is the "hidden logic" that has made GATT successful according toKrugman 1991bKrugman , 1992a in spite of the seeming mercantilistic principles (GATT-think) that he identifies as underlying the GATT. ...
... The use of numerical or computational methods to determine non-cooperative Nash tariffs has since been a feature of the trade conflict literature. These include papers by Abrego et al (2006), Baldwin and Clarke (1987) on the Tokyo round negotiations, Cronshaw (1997) where a trade conflict is modelled as a repeated game, Deardorff and Stern (1987), Foreman-Peck et al (2007) to explain optimal tariffs during the inter-conflict years, Hamilton and Whalley (1982), Harrison and Rutstrom (1991), Markusen and Wigle (1989) on optimal tariffs between Canada and the US, and He et al (2017). ...
The WTO Global Trade Model is employed to project the medium-run economic effects of a global trade conflict. The trade conflict scenario is based on recent estimates in the literature of the difference between cooperative and non-cooperative tariffs. The study provides three main insights. First, the projected macroeconomic effects in the medium run are considerable. A global trade conflict started in 2019 would lead to a reduction in global GDP in 2022 of about 1.96% and a reduction in global trade of about 17% compared to the baseline. For context global GDP fell about 2.1% and global trade 12.4% in the global financial crisis of 2009. Second, behind the single-digit aggregate production effects there are much larger, double-digit sectoral production effects in many countries, leading to a painful adjustment process. In general, a global trade conflict leads to a reallocation of resources away from the most efficient allocation based on comparative advantage. Third, the large swings in sectoral production lead to substantial labour displacement. On average 1.15% and 1.74% of high-skilled and low-skilled workers respectively would leave their initial sector of employment. for useful comments and suggestions on earlier versions of this paper.
... The use of numerical or computational methods to determine non-cooperative Nash tariffs has since been a feature of the trade conflict literature. These include papers by Abrego et al (2006), Baldwin and Clarke (1987) on the Tokyo round negotiations, Cronshaw (1997) where a trade conflict is modelled as a repeated game, Deardorff and Stern (1987), Foreman-Peck et al (2007) to explain optimal tariffs during the inter-conflict years, Hamilton and Whalley (1982), Harrison and Rutstrom (1991), Markusen and Wigle (1989) on optimal tariffs between Canada and the US, and He et al (2017). ...
The WTO Global Trade Model is employed to project the medium-run economic effects of a global trade conflict. The trade conflict scenario is based on recent estimates in the literature of the difference between cooperative and non-cooperative tariffs. The study provides three main insights. First, the projected macroeconomic effects in the medium run are considerable. A global trade conflict started in 2019 would lead to a reduction in global GDP in 2022 of about 1.96% and a reduction in global trade of about 17% compared to the baseline. For context global GDP fell about 2.1% and global trade 12.4% in the global financial crisis of 2009. Second, behind the single-digit aggregate production effects there are much larger, double-digit sectoral production effects in many countries, leading to a painful adjustment process. In general, a global trade conflict leads to a reallocation of resources away from the most efficient allocation based on comparative advantage. Third, the large swings in sectoral production lead to substantial labour displacement. On average 1.15% and 1.74% of high-skilled and low-skilled workers respectively would leave their initial sector of employment. for useful comments and suggestions on earlier versions of this paper.
... The use of numerical or computational methods to determine non-cooperative Nash tariffs has since been a feature of the trade conflict literature. These include papers by Abrego et al (2006), Baldwin and Clarke (1987) on the Tokyo round negotiations, Cronshaw (1997) where a trade conflict is modelled as a repeated game, Deardorff and Stern (1987), Foreman-Peck et al (2007) to explain optimal tariffs during the inter-conflict years, Hamilton and Whalley (1982), Harrison and Rutstrom (1991), Markusen and Wigle (1989) on optimal tariffs between Canada and the US, and He et al (2017). ...
The WTO Global Trade Model is employed to project the medium-run economic effects of a global trade conflict. The trade conflict scenario is based on recent estimates in the literature of the difference between cooperative and non-cooperative tariffs. The study provides three main insights. First, the projected macroeconomic effects in the medium run are considerable. A global trade conflict started in 2019 would lead to a reduction in global GDP in 2022 of about 1.96% and a reduction in global trade of about 17% compared to the baseline. For context global GDP fell about 2.1% and global trade 12.4% in the global financial crisis of 2009. Second, behind the single-digit aggregate production effects there are much larger, double-digit sectoral production effects in many countries, leading to a painful adjustment process. In general, a global trade conflict leads to a reallocation of resources away from the most efficient allocation based on comparative advantage. Third, the large swings in sectoral production lead to substantial labour displacement. On average 1.15% and 1.74% of high-skilled and low-skilled workers respectively would leave their initial sector of employment. for useful comments and suggestions on earlier versions of this paper.
... The use of numerical or computational methods to determine non-cooperative Nash tariffs has since been a feature of the trade conflict literature. These include papers by Abrego et al (2006), Baldwin and Clarke (1987) on the Tokyo round negotiations, Cronshaw (1997) where a trade conflict is modelled as a repeated game, Deardorff and Stern (1987), Foreman-Peck et al (2007) to explain optimal tariffs during the inter-conflict years, Hamilton and Whalley (1982), Harrison and Rutstrom (1991), Markusen and Wigle (1989) on optimal tariffs between Canada and the US, and He et al (2017). ...
The WTO Global Trade Model is employed to project the medium-run economic effects of a global trade conflict. The trade conflict scenario is based on recent estimates in the literature of the difference between cooperative and non-cooperative tariffs. The study provides three main insights. First, the projected macroeconomic effects in the medium run are considerable. A global trade conflict started in 2019 would lead to a reduction in global GDP in 2022 of about 1.96% and a reduction in global trade of about 17% compared to the baseline. For context global GDP fell about 2.1% and global trade 12.4% in the global financial crisis of 2009. Second, behind the single-digit aggregate production effects there are much larger, double-digit sectoral production effects in many countries, leading to a painful adjustment process. In general, a global trade conflict leads to a reallocation of resources away from the most efficient allocation based on comparative advantage. Third, the large swings in sectoral production lead to substantial labour displacement. On average 1.15% and 1.74% of high-skilled and low-skilled workers respectively would leave their initial sector of employment. for useful comments and suggestions on earlier versions of this paper.
... The EC gained more from any proposal other than its own. Baldwin and Clarke (1987) found similar results in their study of Tokyo Round tariff-cutting proposals. One interpretation of these results is that standard welfare measures don't adequately capture government objectives in setting trade policy. ...
This paper analyzes GATT and its dispute settlement procedure (DSP) in the context of a supergame model of international trade featuring both explicit and implicit agreements. An explicit agreement, such as GATT, may be violated at some positive cost in addition to retaliatory actions that might be induced by the violation. We interpret this cost as arising from “international obligation”, a phenomenon frequently mentioned in the legal literature on GATT. We focus on how international obligation affects two aspects of GATT-DSP: unilateral retaliation and the effect of inordinate delays in the operation of DSP.
... expected injury), the government was then faced with the decision of choosing a tariff response: in the case of escape-clause action the tariff response would be set directly, while in the case of the Tokyo Round exclusions the tariff response would be chosen indirectly by setting an exclusion from the agreed-upon tariff reductions. In both cases, the government could anticipate that any action it took would be met by reciprocal responses from foreign trading partners: Article XIX of the GATT provides for this explicitly in the context of escape-clause actions (see Richardson 1988), while the give and take between governments in arriving at exclusions from the Tokyo Round tariff cuts is well documented (see Baldwin and Clarke 1987). ...
We test empirically for evidence that government tariff-setting behavior depends on the degree of discretion with which policy-makers are endowed. We do this by studying government tariff choices under two distinct environments. One environment is that of tariffs set under the Escape Clause (Section 201 of the U.S. Trade Act of 1974). We argue that these decisions afford the government with ample opportunity to reoptimize, and with correspondingly little ability to commit. The other environment is the Tokyo Round of GATT negotiations and the determination of the set of exclusions from the general formula cuts. We argue that these decisions provided the government with a much diminished opportunity to reoptimize, and with a correspondingly greater ability to commit. Comparing decisions made in these two environments allows us to ask whether the degree of policy discretion has a measurable impact on trade policy decisions. Our findings suggest that it does.
... Formulae to reduce dispersion in protection and move higher rates down more than lower ones were used in the Tokyo Round (1973-9), as well as earlier rounds. The experience with the use of formulae illustrates that this is a viable technique, but that the outcome depends substantially on the magnitude of exemptions that are invoked by countries (Baldwin and Clarke, 1988). In order to achieve greater uniformity of protection as well as a decline in the average MFN rate, exceptions must be kept to a minimum. ...
This paper analyzes what actions could be taken in the context of the WTO Doha negotiations to assist countries to benefit from deeper trade integration. It discusses the policy agenda that confronts many developing countries and identifies a number of focal points that could be used both as targets and as benchmarks to increase the likelihood that WTO negotiations will support development. To achieve these targets a number of negotiating modalities are proposed for both goods and services-related market access issues, as well as rule making in regulatory areas. Throughout the analysis reference is made to the work of J. Michael Finger, whose numerous writings in this area have not only greatly influenced the thinking of policymakers and researchers on the interaction between trade policy, economic development and the GATT/WTO trading system, but also provide a model for how to pursue effective policy research. Keywords: Trade policy, economic development, international negotiations, WTO JEL: F13, F35, O19 World Bank Policy Research Working Paper 2851, June 2002 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. Email: Bhoekman@worldbank.org. Prepared for "The Political Economy of ...
This paper analyzes protectionism in a game theoretic context. Non-cooperative equilibrium solutions are calculated for three players, the E.E.C., the U.S. and the Pacific Basin on the basis of the Project LINK model. These are confronted with cooperative scenarios based on bargaining theory. Coalitions of two players against the third are examined in a Nash and Stackelberg equilibrium framework. The numerical results are summarized in qualitative propositions.
What does economics have to say about the design of international trade agreements? We review a literature on this question, providing detailed coverage on three key design features of the GATT/WTO: reciprocity, nondiscrimination as embodied in the MFN principle, and tariff bindings and binding “overhang.” Each of these features is central to the design of the GATT/WTO and we argue that an economic perspective can go a long way toward revealing a consistent logic to the inclusion of these design features in trade agreements.
What tariffs would countries impose if they did not have to fear any retaliation? What would occur if there was a complete breakdown of trade policy cooperation? What would be the outcome if countries engaged in fully efficient trade negotiations? And what would happen to trade policy cooperation if the world trading system had a different institutional design? While such questions feature prominently in the theoretical trade policy literature, they have proven difficult to address empirically, because they refer to what-if scenarios for which direct empirical counterparts are hard to find. In this chapter, I introduce research which suggests overcoming this difficulty by applying quantitative models of commercial policy.
Both economists and political scientists are engaged in developing the theoretical structure of political economy, especially as it applies to international relations.1 The motivation for political scientists is their recognition of the importance of economic factors in shaping domestic and international political relationships in today’s interdependent world. When focussing on the goals of the political and economic actors, they define political economy as the dynamic interactions in international relations arising from the pursuit of power and wealth (Knorr 1973, Gilpin 1975, Keohane, 1984). Alternatively, when focussing on the organizational structure in which the political and economic actors operate, they define the subject as the study of the interaction of the state and the market (Gilpin, 1988).
The management and control of conflict has been an area of major concern to regional scientists for many years. This is reflected in the following definitions of the field provided in Isard ([16]):
1.
‘Regional science is a synthesis of the art of planning and management with the science of spatial systems’;
2.
‘Regional science is the study of spatial conflicts among behaving units and the methods for analysing and resolving these conflicts’;
3.
‘Regional science is the systematic study of the time-space patterns of systems and the ways in which social problems associated with these patterns can be effectively attacked and resolved.’
This paper analyzes the FTA strategies of China, Japan and Korea (CJK) toward ASEAN countries using a three-player game. It explores the implications of China, Japan, and/or Korea participating in an FTA with ASEAN and the corresponding rewards in a payoff matrix. The Nash equilibrium occurs when China, Korea and Japan all choose to participate in an FTA with ASEAN. Dominant strategies and response functions for each country are analyzed using Error Correction Mechanism (ECM) and Vector Auto Regression (VAR) models. The paper also finds that Japan’s action to create FTA will be the most effective for regional settings. Although the game analysis is backward looking, it is a useful benchmark for understanding future FTA policies in East Asia. © 2015, Statistical Economic and Social Research and. All rights reserved.
Developing countries have highlighted the importance of examine the interlink ages between trade, debt and finance in an effort to find sustainable solutions to these challenges within the context of the multilateral trading system. This paper analyzes what actions could be taken in the context of the WTO Doha negotiations to assist countries to benefit from deeper trade integration. It discusses the policy agenda that confronts many developing countries and identifies a number of focal points that could be used both as targets and as benchmarks to increase the likelihood that WTO negotiations will support development. To achieve these targets a number of negotiating modalities are proposed for both goods and services-related market access issues, as well as rule making in regulatory areas. Developing countries must approach WTO negotiations with a firm view of their national priorities, and seek to ensure that multilateral obligations will assist in and not detract from, the realization of development objectives. For the development community this implies priority should be given to strengthening the capacity to identify national priorities and to analyze the cost and benefits of proposed agreements in light of those priorities.
This paper analyzes the actions that could be taken in the context of the WTO Doha negotiations to assist countries in benefiting from deeper trade integration. It discusses the policy agenda faced by many developing countries and identifies a number of focal points that could be used both as targets and as benchmarks to increase the likelihood that the WTO negotiations will support development. To achieve these targets a number of negotiating modalities are proposed both for goods and services-related market access issues, as well as rule making in regulatory areas. Developing countries must approach the WTO negotiations with a firm view of their national priorities, and seek to ensure that multilateral obligations will assist in, and not detract from, the realization of development objectives. For the development community this implies that the priority should be given to strengthening the capacity to identify national priorities and to analyze the cost and benefits of the proposed agreements in light of those priorities.
This chapter discusses the game theory models of peace and war. Game theory's relevance to peace and war was controversial from the start. The debate has continued up to the present day, but it has been conducted mostly in the abstract, with critics trying to prove a priori that game theory is inapplicable. Some aspects of international relations (IR) game theory discussed in the chapter are game analyses of specific international situations; the debate on realism and international cooperation; international negotiations; models of arms building, deterrence, and signaling resolve; the myth that game theory shaped nuclear-deterrence strategy; first-strike stability, and the outbreak of war, escalation; alliances; and arms-control verification. Game-theoretical studies of verification are divided into two groups. The first involves decisions about allocating inspection resources or a quota of inspections limited by treaty. The second asks whether to cheat and whether to accuse in the face of ambiguous evidence. The chapter also discusses military game theory.
Calculations of the basic characteristics of flow around bodies entering the atmosphere in the continuousmedium regime are reviewed. Methods for solving the complete Navier—Stokes equations and different simplified equations are examined: boundary layer, thin (hypersonic) shock layer, complete viscous shock layer, different modifications of the parabolized Navier—Stokes equations. The mathematical properties of the corresponding equations, peculiarities of the numerical solution, the dependence of the range of applicability of these models on the basic determining parameters of the problem and their hierarchy are discussed.
This paper advances a model of multilateral trade negotiations to analyze the effects of the most-favored-nation clause (MFN) on international trade agreements. Negotiations are modeled in a three player, non-cooperative, dynamic bargaining framework that admits the possibility of both bilateral and multilateral agreements. The central result is that bargaining in the presence of MFN results in Pareto efficient, mutually advantageous, multilateral trade agreements. The free-rider problem commonly attributed to the presence of MFN does not arise, and, under a condition of symmetry, each country receives equal gains (or reciprocity) from the agreement. In the absence of MFN, many of these properties may not hold. Examples are given in which at most two of the three countries benefit from agreement. These results suggest that many of the criticisms levied against the MFN clause are misplaced; moreover, attempts to replace unconditional MFN with conditional MFN may sacrifice many of the long-held values of the GATT. Copyright 1991 Blackwell Publishers Ltd..
We present an empirical analysis of factors determining trade wars and agreements under U.S. trade law Section 301. A system of two probit equations is estimated using historical data on Section 301 cases to determine which economic and political factors increase the likelihood of trade frictions. The likelihood of trade war increases when the United States's export share in the world market declines, when the United States is less dependent on the market of the targeted country, when foreign policy makers are in an election year, and when negotiations relate to highly protected and unionized industries in the targeted country. Copyright 1998, Oxford University Press.
We use a world computable general equilibrium model to simulate 143 potential trade reforms and seek solutions to the issues hampering progress in the Doha Development Agenda (DDA). Inside the domain defined by all these possible outcomes, we apply the axiomatic theory of bargaining and select the Nash solution of cooperative games. The solutions vary according to the objective functions adopted by the trade negotiators. When real income is the objective and services are excluded, or when optimising terms of trade is the objective, the Nash solution is the status quo. Trade liberalisation is feasible only when the negotiators focus on national exports or gross domestic product (GDP). Our assessment of some possible solutions reveals that excluding members having a GDP below a certain threshold improves the bargaining process, regardless of the governments’ objective. Formation of coalition, such as the G20, constitutes an option for its members to block outcomes imposed by rich members. We also find that side payments may be a solution, but represent a very high share of the global income gain.
Countries often use a host of policies, such as buffer stocks or variable levies, in order to stabilize their own market or protect themselves against external instability. These policies may transfer domestic price instability to their trading partners.We study a two-country partial equilibrium model in which price variability, triggered by fluctuations in supply, provides the main motive for trade and for the application of appropriate trade policies.While both countries are likely to gain from the stabilizing effects of free trade, the country that intervenes to regulate its trade may reap extra gains at the expense of its trading partner. This may lead, however, to an open “trade war” from which all countries may lose.
The governments of two countries explicitly negotiate over a new pair of tariffs. As soon as they reach agreement, the countries put into effect the agreed-upon pair of tariffs, which must be self-enforcing. We investigate how the difference in the two governments' patience affects the negotiation results. Provided that the common optimum tariff is the status quo tariff rate for each country, we find that the country with the more patient government gains most from the negotiation if the time lag between a defection and punishment in the implementation phase is short. The opposite is true if the response lag in the implementation phase is long.
The author analyzes what actions could be taken in the context of the World Trade Organization's Doha negotiations to assist countries in reaping benefits from deeper trade integration. He discusses the policy agenda that confronts many developing countries and identifies a number of focal points that could be used both as targets and as benchmarks to increase the likelihood that WTO negotiations will support development. To achieve these targets, the author proposes a number of negotiating modalities for both goods and services-related market access issues, as well as rule-making in regulatory areas. Throughout the analysis, the author refers to the work of J. Michael Finger, whose numerous writings in this area have not only greatly influenced the thinking of policymakers and researchers on the interaction between trade policy, economic development, and the GATT/WTO trading system, but also provides a model for how to pursue effective policy research.
The authors propose a methodological extension of quantitative "cost of protection" analyses to consider elementary game-theoretic aspects of the policy process. They illustrate these ideas by evaluating size propositions: nations can "win" trade wars; multilateral negotiations that "merely preserve the status quo" have some value; the terms of the U.S.-Canada free trade agreement can be strategically rationalized; threat points matter in trade negotiations; the negotiating practice of comparing the "value" of one country's concessions with another can dramatically influence bargaining outcomes; and that the substance of multilateral negotiations can be achieved by bilateral negotiations between the bigger countries. Copyright 1991 by Royal Economic Society.
In this paper, we consider a three-stage game in the context of a competing exporters model to compare and contrast the effects of discriminatory and uniform (Most Favored Nation, MFN) tariffs on countries' choice over environmental standards for varying degrees of pollution spillovers. Because of the presence of punishment effects and stronger own and cross-tariff effects, we find that discrimination yields higher standards than MFN (and free trade) independently of the extent of pollution spillovers. When pollution is local and incentives to free ride on other countries' abatement efforts are weak, we show, however, that welfare is larger under MFN than under discrimination. In a dynamic setting, we consider the impact of symmetric and asymmetric treatments on the sustainability of an international environmental agreement (IEA) and obtain that multilateral cooperation is easier to sustain under discrimination than under MFN (or free trade).
This paper examines tariff equilibria in a static two country trade model under a general class of conjectures regarding foreign retaliation. We assume that each country chooses its optimum tariff given some conjecture in this class and derive the associated conjectural tariff equilibrium, which can be thought of as a Nash equilibrium conditional on each country's conjecture about how the foreign country will retaliate. Our main contribution is to show that when marginal propensities to consume imports are sufficiently small, increased expectation of retaliation results in lower equilibrium tariffs for both countries. Since countries in general probably do expect some retaliation, it therefore appears that the traditional Cournot-Nash analysis probably overstates the trade restrictiveness of tariff wars.
We provide a simple model to investigate decisions on vertical integration/separation. The key feature of this model is that more than one input is required for the final products of the local downstream monopolists. Depending on their cost structure, downstream firms' decisions on vertical separation can be both strategic complements and strategic substitutes. As a result, the equilibrium number of vertically integrated firms depends on the cost structure. When the local downstream monopolists merge, vertical separation tends to appear in equilibrium. When an upstream firm can price discriminate, the downstream firms vertically separate. When the downstream firms compete with each other, vertical integration tends to appear if the degree of product differentiation is lower.
Tariff-Cutting Techniques in the Kennedy Round
- Baldwin
Baldwin, Robert E. (1965) Tariff-Cutting Techniques in the Kennedy Round. In Trade, Growth, and the Balance of Payments (R. E. Caves, H. G. Johnson, and P. B. Kenen, Eds.).
An Economic Analysis of the Effects of the Tokyo Round of Multilateral Trade Negotiations on the United States and Other Major Industrialized Countries, MTN Study 5 The Tokyo Round of Multilateral Trade Negotiations
- Alan V Deardorff
- Robert M Stem
Deardorff, Alan V., and Stem, Robert M. (1979) An Economic Analysis of the Effects of the Tokyo Round of Multilateral Trade Negotiations on the United States and Other Major Industrialized Countries, MTN Study 5. Washington, D.C.: Committee on Finance, U.S. Senate. Director-General of General Agreement on Tariffs and Trade (GATT) (1979) The Tokyo Round of Multilateral Trade Negotiations. Geneva: General Agreement on Tariffs and Trade. R.E. Baldwin and R.N. Clarke Friedman, James W. (1986) Game Theory with Applications to Economics. New York: Oxford University Press.
An Economic Analysis of the Effects of the Tokyo Round of Multilateral Trade Negotiations on the United States and Other Major Industrialized Countries
- Deardorff