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Size Inequality, Coordination Externalities and International Trade Agreements

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Listed:
  • Nuno Limao
  • Kamal Saggi
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

  • Nuno Limao & Kamal Saggi, 2011. "Size Inequality, Coordination Externalities and International Trade Agreements," NBER Working Papers 17603, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17603
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    References listed on IDEAS

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    Cited by:

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    2. Paolo E. Giordani & Nadia Rocha & Michele Ruta, 2012. "Food Prices and the Multiplier Effect of Export Policy," CESifo Working Paper Series 3783, CESifo.
    3. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    4. Yasuhiro Takarada & Yasushi Kawabata & Akihiko Yanase & Hiroshi Kurata, 2020. "Standards policy and international trade: Multilateralism versus regionalism," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(5), pages 1420-1441, September.
    5. Giordani, Paolo E. & Ruta, Michele, 2013. "Coordination failures in immigration policy," Journal of International Economics, Elsevier, vol. 89(1), pages 55-67.
    6. Chad P. Bown & Kara M. Reynolds, 2017. "Trade Agreements and Enforcement: Evidence from WTO Dispute Settlement," American Economic Journal: Economic Policy, American Economic Association, vol. 9(4), pages 64-100, November.
    7. Adib Bagh & Josh Ederington, 2024. "Equity‐efficiency tradeoffs in international bargaining," Economic Inquiry, Western Economic Association International, vol. 62(2), pages 782-804, April.
    8. Staiger, Robert & Bagwell, Kyle & Bown, Chad, 2015. "Is the WTO Passé?," CEPR Discussion Papers 10672, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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