Political Externalities, Nondiscrimination, and a Multilateral World, Second Version
During the past half century tariffs have reached historically low levels through gradual, nondiscriminatory, and multilateral liberalization featuring reciprocal concessions. Yet economists have not obtained convincing explanations of why liberalization possesses these characteristics or of what their implications are. There is an extensive theoretical literature on multilateral trade agreements, based on the idea of terms-of-trade externalities between national governments, but this literature is inconsistent with actual agreements. This paper presents an alternative, rudimentary, multi-country model with high initial tariff barriers - a caricature of the world of half a century ago - based instead on political externalities between governments. With remarkably little necessary formal structure-in particular, no formal bargaining model - the framework gives an immediate and transparent role to gradual liberalization, reciprocity, nondiscrimination, and multilateral negotiation that is consistent with and closely parallels actual experience.