Publication: Reciprocity in Free Trade Agreements
Date
2003-05
ISSN
Published
2003-05
Author(s)
Abstract
The author uses detailed trade, tariff,
and income data for countries involved in 91 trade
agreements negotiated since 1980 to test for reciprocity in
free trade agreements. The results offer strong evidence of
reciprocity in North-North and South-South free trade
agreements, but there is little empirical support for
reciprocity in North-South trade agreements. In particular,
after controlling for other determinants of trade
preferences, the results suggest that a one percent increase
in preferences offered leads to about a one-half of a
percent increase in preferences received in North-North and
South-South trade agreements. Freund also finds evidence
that large countries extract greater trade concessions from
small countries. This leads to a modified form of
reciprocity in North-South agreements. A large increase in
access to a developing country market leads to only a small
increase in access to a rich country market. The results
imply that there are incentives for countries to maintain
protection in order to extract more concessions from trade
partners. But in general, such perverse incentives should be
less of a concern in developing countries involved in
North-South agreements because the value of a developing
country tariff preference in terms of its effect on trade
preferences from a rich country is quite small. The gains
from unilateral liberalization are likely to far outweigh
potential gains from using protection as a bargaining chip
in trade negotiations. The evidence is consistent with a
repeated game model of trade liberalization. The model
presented shows that trade preferences granted are
increasing in trade preferences received. This implies that
countries can extract greater concessions from trade
agreement members if they have higher external trade
barriers. However, if a country's trade barriers are
very large then the gains from reneging on the agreement in
the short run will be high, making the agreement
unenforceable despite offering long-term gains. So, there is
a reciprocity-credibility tradeoff. High tariffs may allow
countries to extract more concessions from potential trade
agreement partners, but they also make the country less
credible in actually implementing agreed tariff concessions.
If a country's external tariff is very high relative to
other countries, then it will not be able to commit credibly
to any free trade agreement.
Link to Data Set
Citation
“Freund, Caroline. 2003. Reciprocity in Free Trade Agreements. Policy Research Working Paper;No. 3061. © World Bank, Washington, DC. http://hdl.handle.net/10986/18221 License: CC BY 3.0 IGO.”
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