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Uncertainty and Trade Agreements

Author

Listed:
  • Maggi, Giovanni
  • Limão, Nuno
Abstract
In this paper we explore the potential gains that a trade agreement (TA) can provide by regulating trade-policy uncertainty, in addition to the more standard gains from reducing the mean levels of trade barriers. We show that in a standard trade model with income-risk neutrality there tends to be an uncertainty-increasing motive for a TA. With income-risk aversion, on the other hand, the uncertainty-managing motive for a TA is determined by interesting trade-offs. For a given degree of risk aversion, an uncertainty-reducing motive for a TA is more likely to be present when the economy is more open, the export supply elasticity is lower and the economy is more specialized. Governments have stronger incentives to sign a TA when the trading environment is more uncertain. As exogenous trade costs decline, the gains from decreasing trade-policy uncertainty tend to become more important relative to the gains from reducing average trade barriers. We also derive simple

Suggested Citation

  • Maggi, Giovanni & Limão, Nuno, 2013. "Uncertainty and Trade Agreements," CEPR Discussion Papers 9301, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9301
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    More about this item

    Keywords

    Agreements; investment; Policy uncertainty; Trade;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F5 - International Economics - - International Relations, National Security, and International Political Economy
    • F6 - International Economics - - Economic Impacts of Globalization
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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