Robert W. Staiger

Collusion Over the Business Cycle

We present a theory of collusive pricing in markets subject to business cycle fluctuations. In the business cycle model that we adopt, market demand alternates stochastically between fast-growth (boom) and slow-growth (recession) phases. We provide a complete characterization of the most-collusive prices and show that: (1) the most-collusive prices may be procyclical (countercyclical) when demand growth rates are positively (negatively) correlated through time, and (2) the amplitude of the collusive pricing cycle is larger when the expected duration of boom phases decreases and when the expected duration of recession phases increases. We also offer a generalization of Rotemberg and Saloners (1986) model, and interpret their findings in terms of transitory demand shocks that occur within broader business cycle phases.

The Sensitivity of Strategic and Corrective R&D Policy in Oligopolistic Industries

We evaluate the sensitivity of the case for an R&D subsidy in an export sector when the outcome of R&D is uncertain and when the resulting product market is oligopolistic. Investments in R&D are assumed to induce either first order or mean-preserving second order shifts in the distribution of a firms costs, with firms then competing in either prices or quantities in the product market. When R&D reduces the mean of a firms cost distribution in the particular sense of first order stochastic dominance, we find using standard models of product market competition that a national strategic basis for R&D subsidies exists, whether firms choose prices or quantities. This national strategic incentive to subsidize R&D must be balanced against the national corrective incentive to tax R&D that arises whenever the number of domestic firms exceeds one. However, when R & D preserves the mean but alters the riskiness of a firms cost distribution in the sense of second order stochastic dominance, we find that the national strategic basis for R&D intervention completely disappears, while the national corrective incentive is now to subsidize R&D whenever the number of domestic firms exceeds one. We conclude that the crucial determinant of appropriate R&D policy is the nature of the R&D process itself.

Multilateral Tariff Cooperation During the Formation of Free Trade Areas

The authors consider the impact of the formation of free-trade agreements on multilateral tariff cooperation. They assume that countries are limited to self-enforcing multilateral arrangements that balance the gains from deviating against the costs of an ensuing trade war. The authors find that the emergence of free-trade areas will be accompanied by a temporary retreat from liberal multilateral trade policies, as the initial balance supporting multilateral cooperation is upset. Eventually, however, as the full impact of the emerging free-trade agreement on multilateral trade patterns is felt, this initial balance tends to reemerge and liberal multilateral trade policies can be restored. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

International Rules and Institutions for Trade Policy

Publisher Summary This chapter describes the basic structure of international trade agreements as they exist in practice, explores theoretically the normative consequences of actual and alternative trade agreements, and offers some theoretically-based explanation for the structure of trade agreements. International trade agreements codify attempts by countries to mutually restrain the degree of trade intervention from what might otherwise obtain. Generally, they include three basic elements: substantive obligations; permissible exceptions to those obligations; and enforcement mechanisms. Through the provisions of a trade agreement countries, therefore, typically agree to mutually restrain both their baseline levels of trade intervention and their use of special protection, with the effectiveness of these restraints determined ultimately by the strength of the enforcement mechanisms in place. The chapter describes some of the major themes that characterize the behavior of trade intervention in their presence and discusses why and in what circumstances countries might wish to enter into international trade agreements. It also reviews the literature related to the collection of rules and institutions that define an international trade agreement and explains the issues of enforcement, along with the process of multilateral and bilateral liberalization.

Regionalism and Multilateral Tariff Cooperation

We consider a 3 country world in which each countrys import market is served by competing exporters from its 2 trading partners. We assume that weak multilateral enforcement mechanisms prevent governments from implementing efficient trade policies through a multilateral agreement requiring tariffs to conform to the most-favored-nation (MFN) principle. We then ask whether ex- ceptions from MFN for the purpose of forming preferential agreements can lead to lower external tariffs, and thereby to a more efficient tariff structure under the multilateral agreement. We identify 3 opposing effects of prefer- ential agreements on the multilateral tariff structure in this setting. The tariff complementarity effect works to reduce the desired external tariffs of countries that join together in a preferential agreement. Two additional effects of preferential agreements arise only when enforcement issues at the multilateral level are considered. One of these, the punishment effect, weakens the ability of the member countries of a preferential agreement to punish deviations from the multilateral agreement thereby interfering with the ability of countries to sustain low tariffs under the multilateral agreement. The tariff discrimination effect lets countries to discriminate against those who would external tariffs of countries that join together in a preferential agreement. The relative strengths of these 3 effects determine the impact of a prefer- ential agreement on the tariff structure under the multilateral agreement. Our findings suggest that preferential agreements can have their most desirable effects on the multilateral system when the degree of multilateral cooperation is low.

Reciprocity, Non-Discrimination and Preferential Agreements in the Multilateral Trading System

and non-discrimination, the two principles that are the pillars of the multi- lateral trading system as embodied in GATT and its successor, the WTO. We show that GATTs principle of reciprocity serves to neutralize the world-price effects of a countrys trade policy decisions, and hence can deliver efficient trade-policy outcomes for its member governments provided that the externa- lities associated with trade intervention travel through world prices. We then establish that externalities indeed travel in this way if and only if tariffs also conform to the principle of non-discrimination (MFN). In this way, the principles of reciprocity and non-discrimination can work together to deliver efficient outcomes for the multilateral trading system. We also consider within our framework the implications of preferential agreements for the multilateral trading system. The introduction of free trade agreements com- plicates the way in which externalities are transmitted across countries, and in this environment the principle of reciprocity can not longer deliver efficient multilateral outcomes for its member governments. We do find a limited place for customs unions in the multilateral trading system, provided that the member countries of the union have similar political preferences. As these conditions are quite stringent, we offer little support for the hypothesis that the principle of reciprocity can deliver an efficient multi- lateral trade agreement in the presence of preferential agreements. Instead, our results offer support for the view that preferential agreements pose a threat to the existing multilateral system.

Enforcement, Private Political Pressure, and the General Agreement on Tariffs and Trade/World Trade Organization Escape Clause

We consider the design and implementation of international trade agreements when (a) negotiations occur in the presence of uncertainty about future political pressures, (b) governments possess private information about political pressures at the time that the agreement is actually implemented, and (c) negotiated commitments can be implemented only if they are self‐enforcing. We thus consider the design of self‐enforcing trade agreements among governments that acquire private information over time. We provide equilibrium interpretations of General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO) negotiations regarding upper bounds on applied tariffs and GATT/WTO escape clauses. We also provide a novel interpretation of a feature of the WTO Safeguards Agreement, under which escape clause actions cannot be reimposed in an industry for a period equal to the duration of the most recent escape clause action. We find that a dynamic‐use constraint of this kind can raise the expected welfare of negotiating governments.

An Interpretation of the Factor Content of Trade

Abstract This paper shows that the factor content of trade can be used to indicate effects of trade on relative factor prices. Factor prices in two trading equilibria can be compared by comparing instead their two ‘equivalent autarky equilibria’ constructed by changing factor endowments by the factor content of trade. Using relationships between autarky factor prices and factor endowments, several relationships are derived between factor prices with trade and its factor content. The most general result is a positive correlation between relative changes in the factor content of trade, appropriately normalized, and proportional changes in factor prices.

Do Gatt Rules Help Governments Make Domestic Commitments

We investigate empirically whether GATT rules may have helped the US government make trade policy commitments to its private sector. We study choices under two distinct environments. One environment is the determination of sectoral exclusions in the Tokyo Round of GATT negotiations. The other is the determination of tariA responses under GATT’s escape clause. In each environment the US government was faced with a similar decision, but only in the former environment did GATT rules serve as a potential commitment device. Comparing decisions made across these two environments, we find evidence that GATT rules did help the US government make domestic trade policy commitments that it could not have made in the absence of these rules.

Protection and the Business Cycle

Abstract Empirical studies have repeatedly documented the countercyclical nature of trade barriers. In this paper, we propose a simple theoretical framework that is consistent with this and other empirical regularities in the relationship between protection and the business cycle. Focusing on self-enforcing trade agreements, we find theoretical support for countercyclical movements in protection levels. The fast growth in trade volume that is associated with a boom phase facilitates the maintenance of more liberal trade policies than can be sustained during a recession phase in which growth is slow. We also find that acyclic increases in the level of trade volume give rise to protection, implying that whether rising imports are met with greater liberalization or increased protection depends on whether they are part of a cyclic upward trend in trade volume or an acyclic increase in import levels.