Reciprocated Unilateralism in Trade Policy: An Interest-Group Approach

Abstract

Using the menu-auction approach to endogenous determination of tariffs and allowing additionally for lobby formation itself to be endogenous, this paper analyzes the impact of unilateral trade liberalization by one country on its partner's trade policies. We find that such unilateral liberalization may induce reciprocal tariff reductions by the partner country. Intuitively, unilateral liberalization by one country has the effect of increasing the incentives for the export lobby in the partner country to form and to lobby effectively against the import-competing lobby there for lower protection.

Reciprocated unilateralism in trade policy

“…Fig. 3 illustrates that an increase in the world price of the exportable increases welfare of the exportable group whether it is organized or unorganized (see Krishna and Mitra, 2003 for a detailed mathematical derivation). Thus, the welfare levels are shown with positive slopes.…”

“…The movement of the various countries in B to free trade, may be, for instance, continuous or highly discrete. Nevertheless, setting aside concerns regarding stability and continuity for the moment (see Krishna and Mitra, 2003 for a comprehensive discussion), we can provide here a general discussion of how optimal tariff policy 29 for A may be modified in light of the reciprocity mechanism we have discussed so far. Two situations may be contrasted: one where the large country, A, chooses its tariffs taking the lobby structure in B as fixed and where the lobbies in the small open economies, B, are formed taking the large country's tariff as given (i.e., with simultaneous moves) and a second where A moves first, pre-committing to its tariff level, taking its effect on lobby formation in B into account (i.e., where A leads in Stackelberg-like fashion).…”

“…As we discuss in detail in Krishna and Mitra (2003), the responsiveness of countries in B to tariff reductions by A depends upon a number of parameters in the model. The movement of the various countries in B to free trade, may be, for instance, continuous or highly discrete.…”

“…In the present context (i.e., 27 The discussion that follows is intended as a brief and suggestive description of the results we have obtained regarding the normative implications of the reciprocated unilateralism mechanism. A detailed and formal treatment, dropped from this paper at the suggestion of our editor, can be found in Krishna and Mitra (2003). 28 It is assumed that the general structure of the ''large'' economy is similar to that of the small open economies with which it trades (even though it may differ from them in endowments, the precise technologies used and in its exact preferences): Its consumers have quasi-linear and additively separable utility as in Eq.…”

International trade and investment

“…34 In their research, unilateral reform works to eliminate equilibria in which both countries pursue protectionist policies, and to move the world economy towards freer trade under either majority voting or interestgroup lobbies. Grossman and Helpman, in contrast, identify a protectionist bias in majority politics, caused by a conflict between the ex ante objectives of national party leaders and the ex post objectives of elected legislators.…”