The Theory of Trade Policy and Trade Agreements: A Critique

36 Pages Posted: 7 Jun 2006

See all articles by Wilfred J. Ethier

Wilfred J. Ethier

University of Pennsylvania - Department of Economics

Date Written: June 5, 2006

Abstract

During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-of-trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But it displays two puzzles that cast doubt on its practical relevance: the Terms-of-Trade Puzzle and the Anti-Trade-Bias Puzzle. This paper examines the consistency of the implications of the Received Theory with actual trade policy. The basic conclusion is that the theory is inconsistent with reality. Furthermore, it is the role of terms-of-trade externalities - the central component of the Received Theory - that is the sole cause of this inconsistency.

Keywords: Political externalities, trade agreements, the Received Theory, the Terms-of-Trade Puzzle, the Anti-Trade-Bias Puzzle

JEL Classification: F02, F13

Suggested Citation

Ethier, Wilfred J., The Theory of Trade Policy and Trade Agreements: A Critique (June 5, 2006). PIER Working Paper No. 06-013, Available at SSRN: https://ssrn.com/abstract=907075 or http://dx.doi.org/10.2139/ssrn.907075

Wilfred J. Ethier (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
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