Reciprocal Tariff Reductions Under Asymmetric Bargaining Power

Abstract

arise from trade concessions are balanced (volume approach). See Figure 1 for an overview of the different concepts of reciprocity.History has shown that there has been indeed substantial discretion on how exactly to reciprocate. In the Kennedy Round and in the subsequent Tokyo Round , reciprocity was achieved by applying different types of tariff reduction formulas, see, for example Finger (2002) and Panagariya (2002). In the Uruguay Round (1986-94), however, no specific formula was in place but it could be observed that reciprocity was conducted in a way that is consistent with the volume approach, consult Shirono (2004) and Karacaovali and Limão (2008) for empirical evidence. In the Doha Development Round, initiated in 2001, where the focus is on the needs of developing countries, the focal point for trade liberalisation is again based on tariff formula approaches, see Hoekman and Nicita (2010).Given the different possible ways to achieve reciprocity and the concerns that developing countries could be disadvantaged due to their relative lack of negotiation power, there is a need for a systematic comparison of the different approaches. 2 Therefore, I analyse how the gains from freer trade are distributed across trading partners for different degrees of power asymmetry and for different kinds of reciprocation.This study is most closely related to Epifani and Vitaloni (2006, p. 437) who have shown that for the volume-based approach, the weaker country is worse off than under the unconstrained power-based approach. This is puzzling since the volume approach may 'perversely exacerbate, rather than mitigate, power asymmetries among countries, as argued instead by Bagwell and Staiger' as Epifani and Vitaloni put it. Whereas this is an important result it is by no means clear what the distributional effects of the other category of constrained negotiations, the tariff approach, might be. Therefore, the effectiveness of the different types of constraints that have been observed in past negotiation rounds in achieving the goal of a fairer distribution of the gains from trade is investigated. For this purpose, I will extend the pure exchange general equilibrium model of Epifani and Vitaloni (2006) which in turn builds on Kennan and Riezman (1988) to analyse the effect of two different tariff adjustment formulas, a linear formula and the Swiss formula. The model allows for a straightforward introduction of the tariff approach. Furthermore, it is able to capture some facets of the actual imbalances in trade negotiations which are based on variations in development status. This is because in an endowment framework differences in the quantity of produced goods across countries can be attributed to differences in factor endowments and/or technology. Since variations in development can be explained to a large extent by technological disparities, this could easily be implemented in the model by assigning relatively small endowments for developing countries. To my knowledge, this is also the first attempt to investigate the ba...

The role of coalitions at international tariff negotiations: a CGE perspective

“…Using aggregate income and its distribution across regions is of course a very broad and aggregate perspective on the trade-off, but it can be found quite frequently in international trade literature, see e.g. Freund (2017). Recently, political interest concerning the equity-efficiency nexus is increasing which has spurred research on this topic.…”

Tariff spillovers and new rules for multilateral tariff negotiations

“…Using the framework of Bagwell and Staiger, Shirono (2004) finds that tariff liberalization under the Uruguay Round has indeed been reciprocal, and Finger (2005) confirms this from a political "mercantilist" perspective. Raimondos and Woodland (2018) modify the definition of reciprocity, imposing the requirement that the volume of trade increases by the same proportion in each country, and Freund (2017) explores to what extent different forms of reciprocity reduce power asymmetries.…”