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The Value of Multilateral Trade Liberalization and the Need for Third-Party SanctionKong-Pin ChenAcademia Sinica - Research Center for Humanities and Social Sciences; National Taiwan University - Department of Economics Cheng-Zhong QinUniversity of California, Santa Barbara - Department of Economics Larry D. QiuHong Kong University of Science & Technology (HKUST) - Department of Economics January 2002 Abstract: Trade policies such as tariffs are often featured by the prisoners' dilemma. One country's trade liberalization is vulnerable to the opportunism of another country. This problem is more serious in cases where a country behaving opportunistically can only be punished by the victims. In a trade model with three countries, we show that "circular concessions" are the only way to have any Pareto-improving trade liberalization. The circular nature of the concessions implies that if punishment can be carried only by the victim of opportunistic behavior, multilateral trade liberalization cannot be sustained. Our results have implications for the rule design in multilateral systems such as the WTO.
Number of Pages in PDF File: 17 Keywords: multilateral trade liberalization, WTO JEL Classification: F12, F13 working papers seriesDate posted: February 4, 2002Suggested CitationContact Information
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