The U.S.-China Trade Negotiation: A Contract Theory Perspective

51 Pages Posted: 17 Oct 2019 Last revised: 24 Mar 2020

See all articles by Angela Huyue Zhang

Angela Huyue Zhang

The University of Hong Kong - Faculty of Law

Date Written: October 14, 2019

Abstract

International trade negotiations have traditionally been viewed as a two-level political bargain between trading nations and among domestic interest groups. While this bargaining model is helpful for predicting the political dynamics in trade negotiations, its focus on politics tends to obscure the economic consequences of trade agreements. Drawing upon insights from contract theory in economics, this Article analyzes three ingredients of transaction costs that lead to the incompleteness of a trade agreement — the unforeseen contingencies, cost of enforcing the contract and the cost of writing the agreement. Using the Sino-U.S. trade negotiation between 2018 to 2019 as a comprehensive case study, this Article illustrates the circumstances when a trade agreement is difficult to write, unlikely to succeed and impossible to enforce. As an alternative to a trade agreement, this Article advocates instead for greater economic integration as a commitment device. By allowing each country to hold the other’s assets hostage, economic integration can facilitate cooperation between nations when trust is lacking. This Article contributes to the existing literature by proposing an economic framework to analyze the promise and perils of trade negotiations. It also offers a cautionary tale of using economic sanction to force other countries to make legal concessions.

Keywords: Trade, Contract Theory, Trade War, Intellectual Property, China, Nationalism, Hostage, Trust

JEL Classification: F1, M48, F02, K12, K33

Suggested Citation

Zhang, Angela Huyue, The U.S.-China Trade Negotiation: A Contract Theory Perspective (October 14, 2019). Georgetown Journal of International Law, Vol. 51, No. 4, 2020, University of Hong Kong Faculty of Law Research Paper No. 2019/105, Available at SSRN: https://ssrn.com/abstract=3462241 or http://dx.doi.org/10.2139/ssrn.3462241

Angela Huyue Zhang (Contact Author)

The University of Hong Kong - Faculty of Law ( email )

Pokfulam Road
Hong Kong, Hong Kong
China

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