Issue Linking in Trade Negotiations: Ricardo Revisited or No Pain No Gain

Abstract

There has been much discussion about what issues should be included in international "trade" negotiations. Different countries, firms, and activist groups have quite different views regarding which items should (or should not) be negotiated together. Proposals run the gamut from no linking to linking trade with investment, the environment, labour, and human rights codes. This paper provides a formal framework for analyzing this question. It employs a two-country, two-issue bargaining model and contrasts outcomes when issues are negotiated separately and when they are linked in some form. A key concept is "comparative interest," analogous to Ricardian comparative advantage. We provide general results and note, in particular, where a country can benefit by agreeing to include an agenda item for which, when viewed by itself, the country does not receive a positive payoff. We also provide an application of our analysis to negotiations on trade liberalization and environmental protection.

Keywords: Trade negotiations, Firms, Activist groups, Investment, Environment, Labour, Human rights, Comparative interest, Ricardian

JEL Classification: F13, F18, C78