Size Inequality, Coordination Externalities and International Trade Agreements

33 Pages Posted: 21 Nov 2011 Last revised: 28 Nov 2011

See all articles by Nuno Limão

Nuno Limão

University of Maryland - Department of Economics

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics

Date Written: November 2011

Abstract

Developing countries now account for a significant fraction of both world trade and two thirds of the membership of the World Trade Organization (WTO). However, many are still individually small and thus have a limited ability to bilaterally extract and enforce trade concessions from larger developed economies even though as a group they would be able to do so. We show that this coordination externality generates asymmetric outcomes under agreements that rely on bilateral threats of trade retaliation. such as the WTO. but not under agreements extended to include certain financial instruments. In particular, we find that an extended agreement generates improvements in global efficiency and equity if it Includes the exchange of bonds prior to trading but not if it relies solely on ex-post fines. Moreover, a combination of bonds and fines generates similar improvements even if small countries are subject to financial constraints that prevent them from posting bonds.

Suggested Citation

Limão, Nuno and Saggi, Kamal, Size Inequality, Coordination Externalities and International Trade Agreements (November 2011). NBER Working Paper No. w17603. Available at SSRN: https://ssrn.com/abstract=1962495

Nuno Limão (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-7842 (Phone)
301-405 3542 (Fax)

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States
214-768-3274 (Phone)
214-768-1821 (Fax)

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