Unilateral tari¤s We next turn to the second question raised above: Do the unilateral tari¤ choices of countries re‡ect the market power that they possess?

An early paper that provides evidence on this question is Olarreaga, Soloaga and Winters (1999). Examining the determinants of the common external tari¤ adopted by MERCOSUR in 1996 (a period when the common external tari¤ of MERCOSUR was essentially unconstrained by WTO commitments), they conclude that terms-of-trade e¤ects account for a substantial part (between 6 and 28 percent) of the explained variation in the structure of MERCOSUR tari¤s, despite the fact that during the period of their analysis MERCOSUR had only a 1 percent market share of world trade.

This question is also addressed by the Broda, Limão and Weinstein (2008) paper discussed above. Speci...cally, after estimating the foreign export supply elasticities faced by each of the 15 non-GATT/WTO member countries in their sample, Broda et al relate this measure of the power to a¤ect world prices to the unilateral (i.e., prior to WTO accession) tari¤ choices that each country made. They ...nd that, prior to joining the WTO, these countries set tari¤s an average of 9 percentage points higher on imports for which they could exert large e¤ects on world prices as compared to the tari¤s they set on imports where their ability to a¤ect world prices was limited, an impact whose magnitude is roughly comparable to the size of the average tari¤s in these countries. They also ...nd that this terms-of-trade motive explains more of the cross-industry variation in tari¤s than is explained by commonly used political-economy variables.

Hence, according to the Olarreaga et al. (1999) and Broda et al. (2008) ...ndings, governments who set their trade policies unilaterally and noncooperatively respond to terms-of-trade motives and the market power that they possess strongly and in the way that the theory predicts. These ...ndings are reinforced by the recent paper of Dhingra (forthcoming). Dhingra shows that the median-voter model of non-cooperative tari¤ determination is strongly rejected by the data in its traditional small-country formulation, but that its central predictions receive strong cross-country empirical support once it is cast in a large-country setting and the existence of market power and terms-of-trade motives are taken into account when predicting the cross-country pattern of tari¤s.

Negotiated tari¤s Finally, we consider the third of our three questions: Does the pattern of negotiated tari¤ liberalization that we observe correlate with the pattern of observed market power in the way that the theory suggests it should? As with the literature that takes up this question, we focus below on the pattern of negotiated tari¤ liberalization in the GATT/WTO rather than PTAs. We consider the pattern of liberalization that has taken place within PTAs and its compatibility with the terms-of-trade theory in the context of later discussions.

In light of the literature’s ...nding surveyed just above that market power is a strong determinant of unilateral tari¤ choices, one way to pose this third question is to ask whether the same can be said for negotiated tari¤s. If market power is an equally strong determinant of negotiated tari¤s, then this would indicate a lack of support for the view that trade agreements serve to limit the exercise of market power by their member governments; on the other hand, if negotiated tari¤s 24