This paper analyzes frameworks for the design of the rules for international trading, assuming that it is possible to have some rule of law. In the Arrow-Debreu benchmark, where there is no economic power and political power is seemingly irrelevant, there is no need for trade agreements – free trade is the optimal policy for each country. But under even minimal deviations from that benchmark, trade agreements matter. We focus on environments in which there are market failures, technology is endogenous, and there is political power. Power dynamics play, for instance, a critical role in the design, implementation, and enforcement of agreements, with the latter being a critical difference between international agreements and domestic contracts and a key determinant of the feasibility and consequences of agreements. With endogenous technology, trade rules proscribing industrial policies may lead to lower growth and greater cross-country inequalities. Finally, we develop a framework which may be useful in the design and implementation of trade rules.
Authors
- Acknowledgements & Disclosure
- The authors would like to acknowledge the very thoughtful and constructive comments from David Vines, Simon Cowan, Giovanni Dosi, participants of seminars of the Oxford Review of Economic Policy, the University of Sao Paulo (Brazil), and The Foundations of Complex Evolving Economies Conference at Sant’ Anna School of Advanced Studies (Pisa, Italy), the excellent editorial work of Meaghan Winter, and the financial support of the Sloan and Hewlett Foundations. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32533
- Published in
- United States of America
