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A Political-Economy Theory of Trade Agreements

Giovanni Maggi and Andrés Rodríguez-Clare
The American Economic Review
Vol. 97, No. 4 (Sep., 2007), pp. 1374-1406
Stable URL: http://www.jstor.org/stable/30034097
Page Count: 33
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A Political-Economy Theory of Trade Agreements
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Abstract

We present a model where trade agreements are motivated by the desire of governments to commit vis-à-vis domestic lobbies, in addition to standard terms-of-trade externalities. The model predicts that trade liberalization is deeper when capital is more mobile across sectors, and when governments are more politically motivated (provided domestic-commitment motives are strong enough). The model also provides a new rationale for the use of tariff ceilings. In a fully dynamic specification of the model, tariffs are reduced in two stages: an immediate cut and a subsequent gradual reduction, with the speed of liberalization increasing in the degree of capital mobility.

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