Strategic Interactions in Trade Policy Negotiations

Trade liberalisation is a two-edged sword for many developing and least developed countries because the benefits from improved market access may be offset or outweighed by rising import prices, particularly if export subsidies contribute to holding down prices. In addition, many developing countries receive preferential access that would be eroded with mfn liberalisation. Since adjustment costs following liberalisation are perceived to be significant and uncertain, many countries seek flexibility to minimise their own tariff reductions on sensitive industries while hoping to benefit from the opening of other countries’ markets. Given these conflicting objectives, it is unclear whether developing countries should support the ambitious reform proposals suggested by the United States or a more conservative approach such as that proposed by the European Union. A global general equilibrium model, GTAP, is used to analyse the impact of alternative trade reform proposals. The results point to several interesting implications for developing country negotiators. At least in terms of standard welfare measures or export revenues, countries are not always made better off by following their own proposals. Furthermore, in spite of the emphasis on agriculture, results indicate that developing countries may receive greater gains from liberalisation of manufactures. Finally, the nature of the interactions between the large number of players with diverse and conflicting interests suggest that the negotiations are likely to evolve towards a modest outcome, determined by EU policies as much as any other factor.