Trade Policies Based on Political Externalities: An Exploration, Third Version

38 Pages Posted: 4 Feb 2004

See all articles by Wilfred J. Ethier

Wilfred J. Ethier

University of Pennsylvania - Department of Economics

Date Written: February 2, 2004

Abstract

During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-of-trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But this explanation displays two puzzles that render it inconsistent with actual trade policy and actual trade agreements: the Terms-of-Trade Puzzle and the Anti-Trade-Bias Puzzle. This paper addresses inter-governmental political externalities in a model with terms-of-trade externalities. The model resolves the Terms-of-Trade Puzzle if and only if political externalities dominate terms-of-trade externalities. But it resolves the Anti-Trade-Bias Puzzle, and delivers results consistent with what we actually observe, only if terms-of-trade externalities play no role whatsoever.

Keywords: Political externalities, trade agreements, the Received Theory, the Terms-of-Trade Puzzle, the Anti-Trade-Bias Puzzle

JEL Classification: F02, F13

Suggested Citation

Ethier, Wilfred J., Trade Policies Based on Political Externalities: An Exploration, Third Version (February 2, 2004). Available at SSRN: https://ssrn.com/abstract=498464 or http://dx.doi.org/10.2139/ssrn.498464

Wilfred J. Ethier (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898 5105 (Phone)
215-573-4217 (Fax)

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