We examine international regulatory agreements that are negotiated under lobbying pressures from producer groups. The way in which lobbying influences the cooperative setting of regulatory policies, as well as the welfare impacts of international agreements, depend crucially on whether the interests of producers in different countries are aligned or in conflict. The former situation tends to occur for product standards, while the latter tends to occur for process standards. We find that, if producer lobbies are strong enough, agreements on product standards lead to excessive deregulation and decrease welfare, while agreements on process standards tighten regulations and enhance welfare.
The implications of red-tape barriers (RTBs) under lobbying pressures differ markedly from those of traditional trade barriers. RTBs affect the extensive margin of trade and may respond in opposite ways to reductions in tariffs versus reductions in natural trade costs: The former induce a protectionist backlash that may reduce trade both at the intensive and extensive margin, whereas the latter may induce a reduction in RTBs magnifying the direct trade-increasing effects. Furthermore, if tariff commitments are optimized, the availability of RTBs limits the extent of tariff liberalization, and political uncertainty tends to increase the prevalence of RTBs.
Modern trade agreements no longer emphasize basic trade liberalization but instead focus on international policy coordination in a much broader sense. In this review we introduce the emerging literature on the political economy of such deep integration agreements. We organize our discussion around three main points. First, the political conflict surrounding trade agreements is moving beyond the classic antagonism of exporter interests who gain from trade and import-competing interests who lose from trade. Second, there is a more intense popular backlash against deep integration agreements than there was against shallow integration agreements. Finally, the welfare economics of trade agreements has become more complex, in the sense that the goal of achieving freer trade is no longer sufficient as a guide to evaluating the efficiency of international agreements.
We explore the implications of judicial learning for trade disputes through a model where both the initiation of disputes and the occurrence of rulings are endogenous, governments bargain “in the shadow of the law,” and the efficiency of the court increases with experience. Judicial learning can explain litigation on the equilibrium path, since going to court today implies future payoff gains for the governments. Our model predicts that where learning is present the likelihood of both disputes and rulings should tend to decrease with court experience. Using detailed data on WTO disputes, we find evidence consistent with significant judicial learning at the WTO, but this learning appears to be article-specific and disputant-specific, rather than general, in scope.
I argue that an important potential benefit of international agreements is to reduce wasteful rent-seeking activities by domestic and foreign special interest groups, through a reduction in policy discretion. The presence of foreign lobbying generates a novel type of international externality: by inviting wasteful rent-seeking by foreign lobbies, the presence of policy discretion itself generates a negative international externality. I examine the potential anti-lobbying effects of three salient types of international rules: exact policy commitments, policy bounds and non-discrimination rules. Unlike exact policy commitments, which remove policy discretion and hence shut down ex-post lobbying, policy bounds may invite ex-post lobbying and hence may forego part or all of the potential anti-lobbying gains. I also find that policy bounds may lead to mixed-strategy equilibria of the rent-seeking game. A non-discrimination rule can reduce rent-seeking by foreign lobbies, by injecting a free-rider problem in the strategic interaction between these lobbies, and under some conditions can achieve all the potential anti-foreign-lobbying gains.
We provide a simple but novel model of trade agreements that highlights the role of transaction costs, renegotiation and dispute settlement. The model allows us to characterize the appropriate remedy for breach and whether the agreement should be structured as a system of “property rights” or “liability rules.” We then study how the optimal rules depend on the underlying economic and contracting environment. Our model also delivers predictions about the outcome of trade disputes, and in particular about the propensity of countries to settle early versus “fighting it out.”