Bifurcations in the evolutionary approach to multilateralizing trade policy

ABSTRACT

The Doha Round on multilateral trade liberalization, originally intended to better integrate developing countries into the world economy, has been largely considered a failure. With the Doha outcome falling short of expectations, North–South trade remains underdeveloped. Embedding the political economy and the resulting importance of reciprocating trade liberalization in an evolutionary model along Axelrod–Rapoport lines indicates that factor endowments are crucial in triggering trade policies. Their pivotal nature gives rise to bifurcations, thereby tilting policies towards or away from liberalization trajectories. The theoretical insights are reflected in an empirical analysis, thus strengthening the case for a variable-geometry approach.

KEYWORDS:

• Trade policy
• international political economy
• North–South trade
• evolution
• multilateralization

JEL Classifications:

• F13
• O19
• C73

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. We could easily dispense with the normalization, thus allowing also for different sizes in endowments as to the export industries across countries. However, this would introduce not only additional variables and notation, but also another research question, namely, how differences in size affect cooperation in trade liberalization, which may be quite different from the one of ratios. However, here, our focus is on relative endowments, and the impact of relative versus absolute endowments would then in any case be difficult to disentangle.

2. The two inequalities have been shown to exhaust the strategy space in an Axelrod–Rapoport nexus of social cooperation (Axelrod and Hamilton 1981). They can be neatly carried over to trade policy issues as outlined here, however, in modified form so as to reflect international transmission channels. Maynard Smith (1976) adopts a more restrictive perspective by supposing that frequency parameters must meet strict inequalities in equation (7(7) ).

3. On the relationship between the concept of Nash equilibria and strategies, which are evolutionary stable, see, i.a., the discussion in Cressman and Tao (2014).

4. In fact, research indicates that even if a country is respondent in a trade conflict, the threat of retaliation exerts a liberalizing pressure on the country's trade policy (cf. Dluhosch and Horgos 2013).

5. The Heritage Foundation's trade freedom index provides annual information based on a documented calculation scheme. It combines information on tariffs using the trade-weighted average tariff rate and enriches this information with a penalty scheme for non-tariff barriers. For further information and for downloading the index, see http://www.heritage.org (last accessed on 13 January 2017).

6. To access the raw data from the WTO visit https://www.wto.org/english/tratop_e/dispu_e/ dispu_e.htm (last accessed on 13 January 2017).

7. In recent years, several contributions emerged focusing on calculations of internationally comparable capital stock data. For an overview, see Berlemann and Wesselhöft (2014). Most of these contributions base their calculations on some form of the perpetual inventory method. However, the comparability of results and, thus, the use in cross-country comparisons is very limited because the different calculations are based on different time periods and different (generally only a small number of) countries. Furthermore, results crucially depend on various assumptions such as, for instance, calculating net or gross capital stock data, the inclusion of residential real estate or a specific focus on productive capital stock.

8. We used the PWT version 8.1 released on 13 April 2015, available at www.ggdc.net/pwt (last accessed on 13 January 2017). The latest version of the WDI can be downloaded at http://data.worldbank.org/data-catalog/world-development-indicators (last accessed on 13 January 2017).

9. It is important to note that there exist differences in the trade–freedom–index for different EU member states. As non-tariff barriers, the index considers a variety of categories, inter alia price restrictions, regulatory restrictions like licensing or sanitary standards, or government interventions like subsidies or other aid. While, for example, Germany and the UK score at 85.8 on the trade freedom index in 2009, Italy or France score at 80.8. We will come back to this issue when discussing the robustness of our results.

10. Table 2 presents only the exogenous variables of main interest. Table A1 in the Appendix examplarily presents regression results for the full set of macroeconomic control variables and proxy i.

11. See Table A1 in the Appendix for more details.

12. Considering the peculiarities of the European countries’ trade policies requires to check the robustness of our results. In our regressions, the single European economies are treated as different data points. Even if those countries have the same number of trade conflicts (DSU), this procedure is necessary since European economies yield different scores at the scale of the trade freedom index (see FN9) and differ fundamentally regarding our main exogenous variable (DSU · FES), due to the factor-endowment similarity component (FES). We nevertheless performed two robustness checks: (i) We performed the estimations considering average variable values for the EU as a whole (simple means), instead of treating the European economies as different observations. Results are similar to the results presented in Table 2, even when losing variation in the data due to the aggregation procedure. (ii) Additionally, we estimated equation (10) using the trade freedom index provided by the Fraser institute as alternative endogenous variable. Due to differences in the calculation scheme, the alternative index from the Fraser institute varies even more between the European economies compared to the trade freedom index provided by the Heritage foundation. The results of the second robustness check are again similar regarding sign and significance and, thus, support our argument.