Function Of A Trade Agreement
The United States has another multilateral regional trade agreement: the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). This agreement with Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua eliminated tariffs on more than 80% of U.S. exports of non-textile industrial goods. A government does not need to take specific measures to promote free trade. This « hand-off » attitude is called « laissez-faire » or trade liberalization. The starting point for this survey is the two chapters on trade agreements in the previous volume of the Handbook of International Economics (1995), namely the chapter « International Rules and Institutions for Trade Policy » by Robert Staiger and Richard Baldwin and Anthony Venables, chapter « Regional Economic Integration ». A country can also unilaterally ease trade restrictions, but this rarely happens. This would put the country at a competitive disadvantage. The United States and other developed countries are only doing this as a kind of foreign aid to help emerging countries strengthen strategic industries that are too small to be a threat. Although the WTO is generally referred to as a « free trade institution », it sometimes allows customs duties and, in certain circumstances, other forms of protection. In concrete terms, it promotes a set of rules dedicated to open and fair competition. Governments that have a free trade policy or agreement do not necessarily give up all controls on imports and exports or eliminate all protectionist policies. In modern international trade, few free trade agreements (LEAs) lead to full free trade.
Bagwell et al. (2007) compare this basic auction to an expanded auction, where the home government can also offer the withdrawal of the right of retaliation. Since the home government covers the full costs of lowering the world price of its exports, while each foreign government enjoys only a portion of the benefits, Bagwell et al. Focus on the case where the home government benefits the most from the profits of an auction on the assumption that the maximum policy parameter of each foreign government is not very high. They then find that the home government always wins the bid and that the expected revenue from it is greater in the expanded auction than in the basic auction. Therefore, the country that auctions the right of retaliation prefers the expanded auction of the simple. . . .