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It's a jungle out there: International trade when bargaining power matters

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  • Kwok Tong Soo

Abstract

Anti-globalisation protesters often claim that the gains from trade accrue primarily to large countries. This contradicts conventional trade models, which predict that small countries gain more from trade than do large countries. We first present evidence which shows that the terms of trade do indeed move in favour of countries which become larger. We then develop a model of international trade based on Ricardian comparative advantage, in which the terms of trade are derived based on the bargaining power of the two trading partners. If bargaining power depends on country size, the terms of trade will be in the larger country’s favour. However, general equilibrium adjustments mean that the larger country may not be better off under Nash bargaining than under free trade. The smaller country is unambiguously worse off compared to free trade.

Suggested Citation

  • Kwok Tong Soo, 2017. "It's a jungle out there: International trade when bargaining power matters," Working Papers 194613375, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:194613375
    as

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    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2017_024.pdf
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    References listed on IDEAS

    as
    1. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
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    More about this item

    Keywords

    Nash bargaining; gains from trade; Ricardian model;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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