The Second-Mover Advantage in International Trade Negotiations

The paper explores incentives of national trade representatives (TRs) in international negotiations when trade policy basically follows a non-cooperative track with countries imposing tariffs on each other's exports due to "terms of trade cum international political economy" considerations. The paper shows that negotiations might get stuck even if a limited form of mutual trade liberalization Pareto-dominates the initial Nash-equilibrium in trade policies. The dilemma is rooted in a second-mover advantage, which adds considerable inertia to the Nash equilibrium of protectionism. The second-mover advantage arises whenever the countries' tariffs are strategic complements, with the latter, in turn, conditional on the traded goods being complements in final demand.