Political Externalities, Nondiscrimination, and a Multilateral World

During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The “Received Theory” of multilateral trade agreements, based solely on terms-of-trade externalities between national governments, offers an explanation that has become the conventional wisdom. But it is dramatically inconsistent with actual trade agreements. This paper offers an alternative explanation, based on intergovernmental political externalities, consistent with what we actually observe. With remarkably little necessary formal structure—in particular, no formal bargaining model—this framework (chosen to parallel actual experience) gives an immediate and transparent role to the basic characteristics of contemporary trade agreements: gradual liberalization, reciprocity, nondiscrimination, and multilateralism.