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Dr. Monika Mrázová
London School of Economics, UK

Abstract: This paper shows that oligopolistic markets provide new insights into GATT/ WTO trade agreements. First, there is a rationale for banning export subsidies: in a repeated game, an import-tariff-only regime is more self-enforcing. Second, when only tariffs are available, there is a new rationale for trade agreements: unilaterally set tariffs are inefficiently high, for profit-shifting reasons as well as for familiar terms-of-trade reasons. Trade agreements neutralise both these externalities and help countries to reach efficient tariff levels. Third, when governments are politically motivated rather than social welfare maximisers, trade agreements allow countries reach efficiency only if governments have similar preferences.

Full Text: “Trade Agreements when Profits Matter”