What's the Point of Reciprocal Trade Negotiations? Exports, Imports, and Gains from Trade

Abstract

of gain is the replacement of domestic production by lower-cost imports, whereas increased exports yield no gain (improved terms of trade apart) to the exporting country, but a gain to the foreigner through the same replacement of domestic production by lower-cost imports. Since these gains are attainable by unilateral action, the classical approach provides no explanation of the necessity and nature of the bargaining process.Johnson's puzzle has been a recurring theme in the international trade literature. 2 For example, in addressing the question in the title of his paper, 'What Should Trade Negotiators Negotiate About?' Krugman (1997, p. 113) reiterates Johnson's conclusion: 'The economists' case for free trade is essentially a unilateral case' (italics added). But the puzzle -why do countries actually engage in reciprocal trade negotiations (RTN)? -deserves an answer. One reason often given is that the case for RTN is not economic, but political: for example, there may be an explicit political objective, such as the Europeans' desire, in negotiating their Common Market, to avoid the risk of military conflict; or RTN may provide political cover for reducing one's own tariffs. 3 The purpose of this paper is to demonstrate that the claim that RTN offers little or no economic advantage over UTR is not correct. Consequently, the Johnson-Krugman puzzle -why do countries engage in RTN (say, in the WTO) rather than simply cutting trade barriers unilaterally? -is really no puzzle at all. Each country engages in RTN in order to acquire (1) something it cannot get through UTR, namely, the economic gains on the export side that come from FTR; and (2) assurance (e.g., in the form of WTO tariff bindings) that partners won't damage its export gains by backsliding into increased protection.We do not argue here that economic benefits on the export side have been totally overlooked. 4 Instead we demonstrate below how frequently many authors P AUL WONNACOTT AND RONALD WONNACOTT

Does Importing More Inputs Raise Productivity and Exports? Some Evidence from Indian Manufacturing

“…In the theoretical literature too, the export-import linkage is widely discussed and shown to be strongly interlinked (e.g. Herander and Thomas 1986;Wonnacott and Wonnacott 2005). However, in the case of India, one of fastest and largest emerging economies, the issue is under-represented in the standard literature.…”

Concepts of Fairness in the Global Trading System

“…Wonnacott and Wonnacott (2005) have argued that economists have tended to fall into the opposite error of focusing too much on the gains from unilateral import liberalization, neglecting the gains that come from the reduction of foreign trade barriers through reciprocal tariff negotiations. This is misleading since, as they demonstrate, reciprocal tariff negotiations are economically superior to unilateral tariff reductions.…”

Concepts of Fairness in the Global Trading System

“…Wonnacott and Wonnacott (2005) have argued that economists have tended to fall into the opposite error of focusing too much on the gains from unilateral import liberalization, neglecting the gains that come from the reduction of foreign trade barriers through reciprocal tariff negotiations. This is misleading since, as they demonstrate, reciprocal tariff negotiations are economically superior to unilateral tariff reductions.…”