The Value of Multilateral Trade Liberalization and the Need for Third-Party Sanction
17 Pages Posted: 4 Feb 2002
Date Written: January 2002
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.
Keywords: multilateral trade liberalization, WTO
JEL Classification: F12, F13
Suggested Citation: Suggested Citation