NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Size Inequality, Coordination Externalities and International Trade Agreements

Nuno Limao, Kamal Saggi

NBER Working Paper No. 17603
Issued in November 2011
NBER Program(s):International Trade and Investment

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.

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Document Object Identifier (DOI): 10.3386/w17603

Published: Limão, Nuno & Saggi, Kamal, 2013. "Size inequality, coordination externalities and international trade agreements," European Economic Review, Elsevier, vol. 63(C), pages 10-27. citation courtesy of

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