salvaging gresham s law the good the bad and the illegal contrary to the claims of arthur rolnick and warren weber gresham s law is not a fallacy nor does it rest on the unrealistic assumption of an operational fixed disequilibrium exchange rate between two economically distinct monies here i interpret gresham s law as a result of coercive legal tender laws aimed at discouraging agents from discriminating among alternative monies such laws can systematically drive good money out of circulation by placing buyers and sellers in a prisoner s dilemma in which the use of bad money represents a unique noncooperative equilibrium i offer some historical examples which are not readily explainable using rolnick and weber s proposed alternative to gresham s law copyright 1996 by ohio state university press

international coordination of trade and domestic policies the past half century has seen a dramatic multilateral reduction in tariff barriers under general agreement on tariffs and trade gatt negotiations however as tariff barriers have fallen attention has shifted to the use of domestic policies as secondary trade barriers a primary concern is that as countries sign trade agreements that constrain their ability to pursue trade goals through trade policy there will be unilateral incentives for governments to distort their domestic policies as a secondary means of protection 1 increasingly international trade disputes revolve around a country s use of internal regulations as a means of restricting trade the united states has successfully challenged the system of liquor taxes in both japan and korea as discriminating against imported liquor while venezuela and brazil have challenged american standards for reformulated and conventional gasoline as trade protection masquerading as environmentalism gatt contains several articles concerning the international regulation of domestic policies but the question of how to fully incorporate domestic policies within gatt negotiations and other international trade agreements remains contentious indeed at both the ministerial meeting in 1994 at the close of the uruguay round and the recent unsuccessful ministerial conference in seattle many gatt delegates renewed demands for the relationship between trade and various domestic policies e g environmental policy labor standards or competition policy to be examined despite the importance that has recently been placed on international cooperation over domestic policies no theoretical basis exists for considering how to cooperate over both trade and domestic policies within an international agreement previous papers on negotiation over two instruments of protection e g copeland 1989 1990 thomas l hungerford 1991 have assumed asymmetric limitations on cooperation i e they assume that one of the two instruments is either nonobservable or nonnegotiable this paper extends such work by investigating cooperation over two negotiable instruments of protection under symmetric limitations on cooperation and provides insight into the design of international trade agreements that incorporate cooperation over domestic policies i adopt the view that enforcement issues are central to the understanding of international cooperation one of the challenges of international cooperation is the absence of a central authority to enforce the terms of an agreement without access to an external enforcement mechanism international agreements are viable only as long as member countries view continued cooperation to be in their own self interest i e the benefits from cooperating outweigh the potential gains from cheating 2 while the gatt department of economics university of miami p o box 248126 coral gables fl 33124 e mail ederington miami edu i would like to thank bob staiger bob baldwin wolfgang keller phillip mccalman jenny minier seminar participants at the nber conference on trade the environment and natural resources and two anonymous referees for comments on earlier versions of this paper any remaining errors are of course my own for example brian r copeland 1990 examined negotiation over one trade barrier leaving a secondary trade barrier e g nontariff barriers domestic legislation etc to be set noncooperatively he shows that trade liberalization will induce substitution toward the less efficient nonnegotiable instrument of protection due to the unilateral incentives to maintain trade protection facing countries thus within a cooperative framework the two types of barriers serve as imperfect substitutes for each other 2 as stated by kenneth w dam in his review of the gatt institution the best guarantee that a commitment of any kind will be kept particularly in an international setting where courts are of limited importance and even more important marshals and jails are nonexistent is that the parties continue to view adherence to their agreement in their mutual interest thus the gatt system unlike most legal systems is not designed to exclude self help in the form of retaliation rather retaliation subjected to established procedures and kept within prescribed bounds is made the heart of the gatt system dam 1970 pp 80 81

perfect equilibria in a trade liberalization game the credibility of temporary protection is examined in a simple infinite horizon perfect information game of timing in which the domestic government uses the threat of future liberalization to induce the domestic firm to invest all pure strategy subgame perfect equilibria are cyclical and surprisingly one of them implements optimal temporary protection however this equilibrium fails to pass another credibility criterion called renegotiation proof the game has a unique stationary subgame perfect equilibrium in mixed strategies copyright 1990 by american economic association

is the wto passe the wto has delivered policy outcomes that are very different from those likely to emerge out of the recent wave of preferential trade agreements ptas should economists see this as an efficient institutional hand off where the wto has carried trade liberalization as far as it can manage and is now passing the baton to ptas to finish the job this paper surveys a growing economics literature on international trade agreements and argues on this basis that the wto is not passe rather and subject to some caveats this survey of research to date suggests that the wto warrants strong support while a more cautious view of ptas seems appropriate

the wto trade effect this paper reexamines the gatt wto membership efiect on bilateral trade ows using nonparametric methods including pair matching permutation tests and a rosenbaum 2002 sensitivity analysis together these methods provide an estimation framework that is robust to misspeciflcation biases allows general forms of heterogeneous treatment efiects and addresses potential hidden selection biases this is in contrast to most conventional parametric studies on this issue our results suggest large gatt wto trade promoting efiects robust to various restricted matching criteria alternative indicators for gatt wto involvement different matching methodologies non random incidence of positive trade ows and inclusion of multilateral resistance terms

rent destruction and the political viability of free trade agreements this paper studies the political viability of free trade agreements ftas the key element of the analysis is the rent destruction that these arrangements induce by eliminating intrabloc trade barriers an fta lowers the incentives of import competing industries to lobby for higher external tariffs thereby inducing a reduction of the rents created in the lobbying process using a conventional competitive model i show that the prospect of rent destruction can critically undermine and in some cases rule out entirely the political viability of welfarereducing ftas this result contrasts sharply with findings from the earlier regionalism literature

the effect of the canada us free trade agreement on canadian multilateral trade liberalization in this paper show that the canada us free trade agreement cusfta tariff preferences have triggered a decline in canadian external tariffs explaining a two percentage point reduction in the average tariff between 1989 and 1998 next we found that industries that generate the least export rent to the us firms experienced deeper tariff cuts in canada this result provides evidence of cooperation in trade policies between the us and canada finally we estimate the effect of the cusfta on the intensity of industrial lobbying for trade policy in canada and find no relationship between preferential trade liberalization and lobbying activity resume l effet de l accord de libre echange canada u s sur la liberalisation multilaterale du commerce canadien dans ce texte on montre que les preferences tarifaires de l accord de libre echange canada us alecus ont declenche un declin dans le niveau des droits de douane externes canadiens et expliquent une reduction de deux points de pourcentage dans le tarif moyen entre 1989 et 1998 ensuite on decouvre que les industries qui generent le moins de rentes des exportations vers les etats unis font l experience de reduction de tarifs plus importante au canada ce resultat revele une cooperation dans les politiques commerciales entre canada et etats unis enfin on evalue l effet de l alecus sur l intensite du lobbying industriel a propos de la politique commerciale au canada et on decouvre qu il n existe pas de relation entre la liberation preferentielle du commerce et l intensite de l activite de lobbying

trade agreements with domestic policies as disguised protection abstract wto rules prohibit disguised protection in the form of domestic policies how then do governments cooperate over trade and domestic policies when none can verify whether a nation s domestic tax reduction is a protective measure or a reaction to a production externality in this paper each government privately observes whether a production externality associated with its import competing good is high or low this paper finds that in an optimal agreement disguised protection with domestic policies is never used by governments with a high externality and is never commonly realized moreover in an optimal agreement tariffs may be conditional on domestic policies

multilateral tariff cooperation during the formation of free trade areas we consider the impact of the formation of free trade agreements on multilateral tariff cooperation we assume that countries are limited to selfenforcing multilateral arrangements that balance the gains from deviating against the costs of an ensuing trade war we 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

the role of dispute settlement procedures in international trade agreements although disputes are typically treated as synonymous with concerns about enforcement in economic models of trade agreements in reality most wto disputes seem to concern the interpretation of vague provisions or instances where the agreement is silent and some have suggested that the wto s dispute settlement body dsb could usefully grant exceptions to rigid contractual obligations these activist dsb roles could help complete an incomplete contract but how activist should the dsb be should dsb rulings set precedent we address these questions by characterizing the optimal choice of contract form and dsb mandate under various contracting conditions jel codes d02 d78 d86 f13 k12 k33

bargaining in the shadow of war when is a peaceful resolution most likely this article derives the optimal bargaining strategies of the belligerents when each side has private but incomplete information about the expected outcome of a war should it take place i show that the aggressor s demand curve can be below the defender s offer curve that wars are possible even when both sides are jointly pessimistic and that the relative cost of a war can radically alter the types of disputes that end in war a simple diagram provides the intuition for most of the major propositions

multilateralism and the endogenous formation of preferential trade agreements abstract this paper examines the interaction between preferential trade agreements ptas and multilateral tariff reduction in a model of imperfect competition a growing literature finds that the formation of ptas alters the incentives for and the sustainability of multilateral tariff reduction we show that the causation is not one sided multilateral tariff reduction also affects the formation of ptas specifically tariff reduction enhances the incentives to form a pta and increases the likelihood that it is self enforcing thus each round of multilateral tariff reduction should lead to a new wave of ptas this may help to explain the current trend towards regionalism

the economics of special interest politics the case of the tariff this paper investigates the interaction of politicians and special interest lobbies the goal is to model the equilibrium levels of redistributive policies such as taxes subsidies tariffs and regulatory decisions the model is applied throughout to the setting of tariffs by contributing to political campaigns special interest lobbies generate economic returns higher tariffs generate revenue for import competing industries through higher product prices higher milk support prices raise dairy farm income and so forth the lobby invests to maximize these net economic returns in evaluating their chances of election politicians weigh the favorable effects of special interest money against the unfavorable association with the lobby and the social cost of the redistributive policy section i explores the lobby s problem it describes a formalization of mancur olson s discussion of the voluntary provision of public goods and optimal contributions by lobbies to political campaigns section ii describes determination of the equilibrium tariff positions of each politician in a political campaign

managed trade with imperfect information central to the general agreement on tariffs and trade gatt agreement signed in 1947 by 23 nations was the reduction of tariffs this had the direct result of bringing down the average ad valorem tariff on industrial goods from over 40 in 1947 to under 4 by the time of the uruguay round in 1995 furthermore following the kennedy round of 1969 the objectives of the gatt and of its successor the world trade organization wto were expanded so as to help bring down nontariff barriers as well remarkably these reductions were achieved in the absence of any external enforcement mechanism intended to punish gatt wto violators commitments were kept only as long as nations continued to view adherence to the agreements as being in their mutual interest 2 it is precisely because the contracting parties of the gatt wto have made it their top priority to reduce trade distortions that the subject of safeguards as an exception to the general rule of liberalizing trade comes into play when governments know they can increase tariffs temporarily in the event of a surge in import volume they agree to negotiate a more substantial tariff reduction during the negotiation stage 3 the move toward special protection is motivated in part by the fact that volatility in trade flows has become a more important source of domestic disruption these special protection policy tools are typically used to limit the rate of import or export expansion from that which would occur in the absence of intervention they are aimed at mitigating the underlining changes in trade flows where the basic insight developed in the literature is consistent with different government objectives to this end corden 1974 has argued that countries rarely initiate protection for the purpose of capturing the terms of trade gains presumably because of the fear of future retaliation by their trading partners countries

is there a case for non discrimination in the international protection of intellectual property abstract we evaluate the case for non discrimination in international patent protection when trade is not subject to any frictions barriers requiring national treatment nt does not affect the rate of innovation and welfare since unfavorable discrimination suffered abroad by innovators in the absence of nt is fully offset by favorable discrimination enjoyed by them at home when trade barriers exist however such international offsetting in patent protection is incomplete and innovation incentives are actually lower under nt by lumping domestic and foreign patent protection together nt blunts the overall effectiveness of patent protection in incentivizing innovation in the presence of trade barriers

endogenous lobby formation and endogenous protection a long run model of trade policy determination this paper provides a theory of lobby formation within a framework in which trade policy is determined through political contributions under certain conditions free trade turns out to be an equilibrium outcome either when the government has a high affinity for political contributions or when it cares a great deal about social welfare moreover greater inequality in asset distribution results in a greater number of lobbies and in most cases more protection for each of these lobbies furthermore industries with higher levels of capital stock fewer capitalists more inelastic demand and smaller geographical dispersion are the ones that get organized

welfare enhancing export subsidies this paper shows that export subsidies on marginal goods and those on nonmarginal goods have opposite welfare effects for the country imposing these subsidies where marginal goods are the ones that would be exported by only a small amount or not at all under free trade but whose export can be promoted considerably by export subsidies the former enhances the imposing country s welfare while the latter worsens it the paper also throws light on related issues such as industrial targeting policy

trade creation and trade diversion in the canada united states free trade agreement in this paper the changes in trade patterns introduced by the canada united states free trade agreement are examined variation in the extent of tariff liberalization under the agreement is used to identify the impact of tariff liberalization on the growth of trade both with member countries and non member countries data at the commodity level are used and the results indicate that the canada united states free trade agreement had substantial trade creation effects with little evidence of trade diversion jel classification f13 f14

tariffs and the most favored nation clause abstract in an n country oligopoly model of intraindustry trade n 3 this paper explores the economics of the most favored nation mfn principle under the non cooperative tariff equilibrium each country imposes higher tariffs on low cost producers relative to high cost ones thereby causing socially harmful trade diversion mfn adoption by each country improves world welfare by eliminating this trade diversion under linear demand mfn adoption by the country with the average production cost is most desirable high cost countries refuse reciprocal mfn adoption with other countries and also lose even if others engage in reciprocal mfn adoption amongst themselves

the negotiation of sustainable tariffs abstract the governments of two countries explicitly negotiate over a new pair of tariffs as soon as they reach agreement the countries put into effect the agreed upon pair of tariffs which must be self enforcing we investigate how the difference in the two governments patience affects the negotiation results provided that the common optimum tariff is the status quo tariff rate for each country we find that the country with the more patient government gains most from the negotiation if the time lag between a defection and punishment in the implementation phase is short the opposite is true if the response lag in the implementation phase is long