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Endogenous Politics and the Design of Trade Agreements

Author: Kristy Buzard

Date: May 2014

Abstract

Political pressure is undoubtedly an important influence in the setting of trade policy and the formulation of trade agreements. Most of the literature models the political pressure that governments face as resulting from an exogenous, stochastic process. This paper shows that when political pressure arises endogenously, important results can be overturned and new insights into the motivation for features of the trade agreements we observe and rules of organizations such as the WTO come to light. Using a weighted Baldwin-style government objective function, I show that governments may want to use tariff caps both to force special interest groups to continue lobbying after a trade agreement is signed and to reduce the magnitude of that lobbying effort. Endogenous politics can destroy an escape clause's ability to provide flexibility in times of large negative political shocks when lobbies use the flexibility to seek rents. This can explain why use of WTO Safeguards are conditioned on measurable economic indicators as well as why Safeguard levels of protection are not regulated

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