"Nash-in-Nash" Tariff Bargaining with and without MFN

Abstract

We thank Henrik Horn and seminar participants at LSE, Stanford University and the 2017 Research Workshop on the Economics of International Trade Agreements at Villars. We thank the NSF (Grant SES-1326940) for financial support. We thank Ohyun Kwon for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w23894.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Quantitative Analysis of Multi-Party Tariff Negotiations

“…Armed with our trade-model, cost-of-transfers and bargaining-power parameters, we then turn to the consideration of counterfactual bargaining protocols. As we have described, under our representation of the Uruguay Round bargaining protocol, our results point to the existence of unfinished business with respect to the tariffs under negotiation in the Uruguay Round; and we find that further reductions in average tariffs are required to achieve the world-welfare maximizing benchmark, in line with the under-liberalization possibility identified by Bagwell et al (2017b) when negotiations proceed over MFN tariffs. This raises the possibility that changes to the protocol that stimulate further negotiated tariff liberalization could be attractive from the perspective of world welfare.…”

“…In this paper we analyze bilateral tariff bargaining in a multi-country quantitative trade model. Bagwell et al (2017b) develop an equilibrium analysis of bilateral tariff bargaining in a three-country trade model and show that, due to the distinct nature of the externalities associated with non-discriminatory versus discriminatory tariffs, in the presence of an MFN rule tariff bargaining typically leads to inefficient outcomes that can 1 As Bagwell et al (2017a) explain, early GATT rounds allowed as well for a multilateral element, in that negotiated offers could be re-balanced at the end of the round as necessary for multilateral reciprocity.…”

“…To model bilateral tariff bargaining in this environment, we follow Bagwell et al (2017b) and adopt the solution concept of Horn and Wolinsky (1988). This solution concept, which is commonly employed by the Industrial Organization literature to characterize the division of surplus in bilateral oligopoly settings where externalities exist across firms and agreements, is sometimes referred to as a "Nash-in-Nash" solution, because it can be thought of as a Nash equilibrium between separate bilateral Nash bargaining problems.…”

“…Micro-foundations for the Nash-in-Nash approach are developed by Collard-Wexler et al (2016) in the context of negotiations that concern bilateral surplus division. The trade application considered by Bagwell et al (2017b) and that we consider here is different, however, in that the negotiations focus on tariffs (rather than lump-sum transfers) which have direct efficiency consequences.…”

“…4 As Bagwell et al (2017b) observe, the most direct interpretation of the Nash-in-Nash approach is in terms of a delegated agent model, where a player is involved in multiple bilateral negotiations while relying on separate agents for each negotiation, and where agents are unable to communicate with one another during the negotiation process. This interpretation has some obvious drawbacks in settings such as tariff negotiations where within-negotiation communication between agents (trade negotiators) associated with the same player (government) across different bilaterals are clearly feasible.…”