Reciprocity, World Prices and Welfare
26 Pages Posted: 17 Oct 2011
Date Written: October 17, 2011
We examine in detail the circumstances under which reciprocity, as defined in Bagwell and Staiger (1999), leads to fixed world prices. We show that a change of tariffs satisfying reciprocity does not necessarily imply constant world prices in a world of many goods and countries. While it is possible to find tariff reforms that are consistent with both reciprocity and constant world prices, these reforms do not follow from the reciprocity condition, but rather from the requirement of unchanged world prices. We propose an alternative reciprocity rule that is guaranteed to raise the welfare of all countries, independently of whether world prices change and independently of the relative numbers of goods and countries.
Keywords: GATT, reciprocity, fixed world prices
JEL Classification: F020, F130, F150
Suggested Citation: Suggested Citation