TY  - JOUR
AU  - Maggi,Giovanni
AU  - Rodriguez-Clare,Andres
TI  - A Political-Economy Theory of Trade Agreements
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11716
PY  - 2005
Y2  - October 2005
UR  - http://www.nber.org/papers/w11716
L1  - http://www.nber.org/papers/w11716.pdf
N1  - Author contact info:
Giovanni Maggi
Department of Economics
Yale University
37 Hillhouse Avenue Rm 27
New Haven, CT 06511
Tel: 203/432-3569
Fax: 203/432-6323
E-Mail: giovanni.maggi@yale.edu

Andres Rodriguez-Clare
University of California at Berkeley
Department of Economics
Berkeley, CA 94720-3880
E-Mail: andres1000@gmail.com
AB  - This paper presents a theory of trade agreements where "politics" play an central role. This stands in contrast with the standard theory, where even politically-motivated governments sign trade agreements only to deal with terms-of-trade externalities. We develop a model where governments may be motivated to sign a trade agreement both by the presence of standard terms-of-trade externalities and by the desire to commit vis-a-vis domestic industrial lobbies. The model is rich in implications. In particular, it predicts that trade agreements result in deeper trade liberalization when governments are more politically motivated (provided capital mobility is sufficiently high) and when capital can move more freely across sectors. Also, governments tend to prefer a commitment in the form of tariff ceilings rather than exact tariff levels. In a fully dynamic specification of the model, trade liberalization occurs in two stages: an immediate slashing of tariffs and a subsequent gradual reduction of tariffs. The immediate tariff cut is a reflection of the terms-of-trade motive for the agreement, while the domestic-commitment motive is reflected in the gradual phase of trade liberalization. Finally, the speed of trade liberalization is higher when capital is more mobile across sectors.
ER  -