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Gradual Co-operation in International Trade Policy

This project, which is theoretical, attempts to explain why we observe gradual growth of co-operation (i.e. gradual reduction in tariff and non-tariff barriers), rather than "big-bang" reforms. The explanation we offer is that reductions in co-operation are costly or partially irreversible, due to dynamic changes in private sector behaviour following trade liberalisation. This transforms the repeated prisoner’s dilemma of the standard tariff game into a dynamic game. In this game, the minimal perfect equilibrium tariffs are decreasing over time, for any fixed rate of discount less than unity.

A second piece of work in this project looks at a model of repeated cooperation (similar to the previously mentioned one) but supposes further that cooperative decisions are, to an extent, irreversible. The idea is that decisions, say to reduce tariff barriers, may lead to sectoral shifts in capital investment (away from import competing technologies towards export sectors) which are difficult to reverse. In an abstract representation of this problem, we find that this irreversibility actually forces cooperation to evolve gradually, even though parties would be better off if there were some way of enforcing a more rapid increase in cooperation. At the moment we are attempting to translate this into a more fully specified trade model, and this latter work is still at a preliminary stage.

The theoretical paper arising from the project and dealing with the basic issues (joint with Jonathan Thomas) has received a very positive "revise and resubmit" from the Review of Economic Studies, one of the leading journals in Economics. A more applied paper on the implications of the basic model for the maximum rate of tariff reduction in an n-country version of the model is planned. A sensitivity analysis using computer simulations, to identify how the maximum rate of reduction depends on key parameters, is also planned.

 

Output:

 

Ben Lockwood and Jonathan P. Thomas, "Gradualism and Irreversibility", CSGR Working Paper 28/99, May 1999, Abstract, Full Document PDF icon