Liberalization Agreements in the GATT/WTO and the Terms‐of‐Trade Externality Theory: Evidence from Three Developing Countries

Abstract

The terms‐of‐trade theory suggests that governments engage in trade negotiations with their trade partners in an effort to escape from a terms‐of‐trade prisoner's dilemma by mutually internalizing externalities that they impose on each other. In this paper, I use predictions of the terms‐of‐trade relationship to provide support for the theory based on the negotiating patterns of three developing countries during the Uruguay Round of the Generalized Agreements on Tariff and Trade. I use industry level import value as well as tariff schedules from these contracting party states that were graduated from the US Generalized System of Preferences list during the Uruguay Round. I exploit the rapid change in their tariff schedules from the best response to the optimal level within a single negotiation round to empirically test the terms‐of‐trade theory. I find that my estimates are consistent with the predictions of the theory as applied to these three developing countries that were compelled to negotiate for tariff concessions during the Uruguay Round.