Self-enforcing Trade Agreements, Dispute Settlement and Separation of Powers
Abstract: This paper presents a model of international trade agreements in which the executive branches of each government negotiate agreements while the legislative branches, subject to political pressure, can disrupt them. Lobbying is in the style of Grossman and Helpman (1994) with a new feature: all actors face uncertainty arising from the complexity of the legislative process. I demonstrate that the lower the executives set tariffs in a trade agreement, the more effort lobbies put forth to prevent its ratification. Thus trade agreements act as a domestic political commitment device: executives set relatively high tariffs to discourage lobbying and help the legislatures to withstand political pressure. This reconciles the result from tests of Grossman and Helpman's model that protection levels are high relative to contributions given estimates of governments' social-welfare weights. The need to balance conflicting repeated-game incentives of the legislature and lobby lead to new predictions for the optimal design of mechanisms for resolving the disputes that arise in the course of trade-agreement relationships.
