Introduction: Juggling with WTO Rules in Latin America

Latin American countries, as small exporters not able to affect their terms of trade, should open their markets regardless of what others states do. That they have rarely done so have puzzled trade economists. In the 1980s, when finally Latin American governments adopted a trade regime based on low average tariffs, economists were still questioning why had them for so long stubbornly eluded the full benefits of free trade. Trade policy analysts have concluded, however, that the vast gaps between the normative prescriptions of the basic model of trade theory and the reality of domestic and international trade policies pointed to the inadequacy of these market-based and rules-absent trade models for describing the economic policy process. Markets do not operate in a vacuum of rules and power. Equally, markets and governments are inescapable and mutually supportive components of the economic reality, albeit they are both imperfect systems.1 As the literature on institutions recognizes, all participants in the trade policy-making process face several types of transaction costs in the form of contracting problems, asymmetric information, vulnerability to opportunism, and the need for credible commitments to policy rules.2 Participants in the economic policy-making process adopt strategic behavior in a context of interdependent decisions to deal with these costs Schelling, 1960; Dixit, 1996). The inclusion of transaction costs in the conceptual framework integrated politics into the economic analysis of trade policy.