James Lake

FREE TRADE AGREEMENTS AS DYNAMIC FARSIGHTED NETWORKS

In the presence of multilateral negotiations, are Free Trade Agreements (FTAs) necessary for, or will they prevent, global free trade? I answer this question using a dynamic farsighted model of network formation among asymmetric countries. Ultimately, FTAs prevent global free trade when there are two larger countries and one smaller country but FTAs can be necessary for global free trade when there are two smaller countries and one larger country. The model provides insights into the dynamics of recent real world negotiations and recent results in the literature on the empirical determinants of trade agreements.

Domestic Political Competition and Pro‐Cyclical Import Protection

Governments, especially in developing countries, routinely practice binding overhang (i.e. setting applied tariffs below binding WTO commitments) and frequently move applied tariffs for given products up and down over the business cycle. Moreover, applied tariffs are pro-cyclical in developing countries. We explain this phenomenon using a dynamic theory of lobbying between domestic interest groups. Applied tariffs are pro-cyclical when high-tariff interests (e.g. import-competing industries) capture the government these groups concede lower tariffs to low-tariff interest groups (e.g. exporting firms or firms using imported inputs) during recessions because recessions lower the opportunity cost of lobbying and thereby generate stronger lobbying threats.