A Unified Theory of Trade Agreements

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What problem do trade agreements attempt to solve? An answer to this question is necessary to understand trade agreements. For years there was a consensus among economists that a trade agreement's fundamental role was to prevent the prisoner's dilemma that results from nations using trade policy to manipulate their terms of trade in their favor. But this consensus has been challenged by the possibility of other motives for trade protection that arise in the presence of imperfect competition. A government can also use trade policy to attract profits, employment, and firms within its borders. This variety of motives then raises the question of whether there exists a purpose for trade agreements distinct from that found in the perfectly competitive benchmark. My proposed dissertation restores the previous consensus behind the terms-of-trade motive for trade agreements. I consider trade agreements in a quite general setting that imposes limited assumptions on consumer preferences, government preferences, and market structure. Despite the various motives for trade policy, I establish that trade agreements are always efficient if they force governments to act is if they do not value rents from terms-of-trade improvements. Having established this result, I can proceed to provide a more robust interpretation and evaluation of WTO principles. By allowing for quite general consumer and government preferences, my trade agreement theory brings back a desirable feature of the perfectly competitive literature that has yet to enter the imperfectly competitive literature. The seminal perfectly competitive paper, Bagwell and Staiger (1999), permitted not only the case when governments maximize income but also the case when governments s... ... middle of paper ... ...hmark case, detailed in a series of papers by Bagwell and Staiger (2001a, 2001b), in which the WTO's market access focus does lead to efficiency, and counterfactually governments never would desire restrictions on specific domestic policies to prevent a race-to-the-bottom in domestic production standards. I intend to establish conditions under which governments would and would not desire restrictions on specific domestic policies. My paper "Domestic Policies in Trade Agreements When Firms Matter" details a specific case in which governments do desire such restrictions, and the WTO rules do not lead to efficiency. But like Ossa (2009), this result relies though on exogenous restrictions on governments' use of export policies. I intend to investigate whether this result extends to the more relevant setting in which restrictions on export policies are endogenous.
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