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Unilateral Trade Liberalization as Leadership in Trade Negotiations

Author

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  • Rodney D. Ludema

    (Georgetown University)

  • Daniel E. Coates

    (U.S. General Accounting Office)

Abstract

This paper constructs a model of bilateral trade negotiations in the presence of political risk to demonstrate that unilateral trade liberalization may be an optimal policy for a large country. The political risk takes the form of domestic opposition to trade agreements. Unilateral liberalization performs a risk-sharing function: when agreement implementation is blocked, the resulting tariffs are inefficient; a unilateral tariff reduction partially eliminates this inefficiency, but at a cost to the terms of trade of the liberalizing country. The quid pro quo comes in the form of more favorable terms for this country in any agreement that ends up being successful. The unilateral tariff reduction also diminishes the likelihood that a bilateral agreement is blocked, by reducing the incentive of domestic political interests to oppose it. We demonstrate the possibility of an inverse relationship between a country's monopoly power in trade and its optimal unilateral tariff.

Suggested Citation

  • Rodney D. Ludema & Daniel E. Coates, 1998. "Unilateral Trade Liberalization as Leadership in Trade Negotiations," International Trade 9802002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpit:9802002
    Note: Type of Document - MS Word; prepared on IBM PC; to print on HP; pages: 41 ; figures: included. Thanks are due to Robert Baldwin, Jagdish Bhagwati, Robert Feenstra, Jonas Fisher, Andreas Hornstein, Robert Staiger, Ian Wooton, participants of the NBER Conference on International Trade Rules and Institutions, and participants of the 13th Annual Conference on International Trade, University of Western Ontario. Views expressed here do not reflect those of the U.S. General Accounting Office. All errors are ours alone.
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    References listed on IDEAS

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    Cited by:

    1. Pravin Krishna & Devashish Mitra, 2003. "Reciprocated Unilateralism in Trade Policy: An Interest-Group Approach," NBER Working Papers 9631, National Bureau of Economic Research, Inc.
    2. Coates, Daniel E. & Ludema, Rodney D., 2001. "A theory of trade policy leadership," Journal of Development Economics, Elsevier, vol. 65(1), pages 1-29, June.

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    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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