Who Negotiates International Trade Agreements


To model the asymmetry of the multilateral trading system, Bowen (2013) introduces random political shocks in the competing import sectors of each country, designated by the political parameters ,i) of Section 2.2.1. These shocks are random but publicly observable, which prevents any information on the implementation of trade agreements analyzed in the previous subsection. However, such shocks may further encourage governments to deviate if they are forced to tolerate a series of less favourable bilateral tariffs, which depend on the realization of political shocks requiring asymmetric tariffs. If the discount factor is not high enough to impose the most cooperative quota duties within the multilateral penal system, the mechanism can set the maximum number of less favourable bilateral tariffs that each government must tolerate. Governments are allowed to impose their static tariffs on the Nash if they are in a bilateral trade relationship where at least one country is facing political shocks resulting in less favourable bilateral tariffs that exceed that ceiling. Referring to this maximum number as an indulgence, Bowen (2013) characterizes the leniency allowed in a multilateral cooperative political balance (designated by q) for a given discount factor, and shows that this q is approached by an increasing linear function of the number of countries. Such an outcome has been interpreted as an additional benefit of multilateralism. Bowen also shows that the leniency factor calculated by division q by the number of countries increases, with the discount factor and the volume of bilateral trade, indicating that the stability of the multilateral trade agreement improves with the increase in the volume of bilateral trade. To implement the low tariff policy between the 1930s and the early 1970s, Congress gave the U.S. president the power to unilaterally negotiate international trade agreements and reduce tariffs through executive agreements, both within the limits set by Congress. This streamlined trade negotiations, agreements and implementation, allowing the United States to move faster as part of congressional guidelines. A natural question at this stage is whether there is really a coherent logic for the development of trade agreements.

Are the characteristics of these agreements considered sufficiently “useful” and deliberate to support the view that they can be analyzed wisely from an economic point of view? We argue in this chapter that the answer is yes.c In order to develop this argument, we present formal models regarding the essential purpose and design of the GATT/WTO, and we will also write down the impact of these models on legal and historical writings relating to the purpose and design of trade agreements. As a multilateral trade agreement, GATT calls on its signatories to extend the status of the Most Preferred Nation (MFN) to other trading partners participating in the WTO. MFN status means that each WTO member enjoys the same tariff treatment of its products in foreign markets as the “preferred” country that competes in the same market, thus excluding preferences or discrimination from a Member State. Critics of bilateral and regional approaches to trade liberalization have many additional arguments. They propose that these approaches undermine and supplant the MULTILATERAL approach of the WTO, which must be favoured for global use on a non-discriminatory basis, rather than supporting and complementing it. Therefore, the long-term outcome of bilateralism could be a deterioration of the global trading system into competing and discriminatory regional trading blocs, which could lead to additional complexity that complicates the flow of goods between countries.