We analyze unilateral, efficient and Nash trade policies in a symmetric, two-country version of the Melitz-Ottaviano (2008) model. Starting at global free trade, we show that a country gains from the introduction of (1) a small import tariff; (2) a small export subsidy, if trade costs are low and the dispersion of productivities is high; and (3) an appropriately combined small increase in its import and export tariffs. The welfare of its trading partner, however, falls in each of these three cases. The market may provide too little or too much entry, depending on a simple relationship among model parameters. Correspondingly, global free trade is generally not efficient, even within the class of symmetric trade policies. We also provide conditions under which, starting at the symmetric Nash equilibrium, countries can mutually gain by exchanging small reductions in import tariffs, export tariffs or combinations thereof. More generally, we show that Nash equilibria are inefficient while “politically optimal” policies are efficient, indicating a central role for the terms-of-trade externality. We also discuss why the model's implications for the treatment of export subsidies in trade agreements differ from those that obtain in a model with CES preferences for the differentiated-goods sector.

We provide an equilibrium analysis of the efficiency properties of simultaneous bilateral tariff negotiations in a three-country model of international trade. We consider the setting in which discriminatory tariffs are allowed, and we utilize the “Nash-in-Nash” solution concept of Horn and Wolinsky (1988). We allow for a general family of political-economic country welfare functions and assess efficiency relative to these welfare functions. We establish a sense in which the resulting tariffs are inefficient and too low, so that excessive liberalization occurs from the perspective of the three countries.

This paper empirically examines recently declassified tariff bargaining data from the GATT/WTO. Focusing on the Torquay Round (1950–1951), we document stylized facts about these interconnected high-stakes international negotiations that suggest a lack of strategic behavior among the participating governments and an important multilateral element to the bilateral bargains. We suggest that these features can be understood as emerging from a tariff bargaining forum that emphasizes the GATT pillars of MFN and multilateral reciprocity, and we offer evidence that the relaxation of strict bilateral reciprocity facilitated by the GATT multilateral bargaining forum was important to the success of the GATT approach.

As the World Trade Organization (WTO) begins its third decade, its future is uncertain. The initial expectation that the WTO would be the fulcrum for future international trade agreements has not been met. At best, its tenure has had mixed results. This review addresses the political consequences of WTO membership, focusing on the rules and norms of the regime and why they have become less functional over time; looks at the effectiveness of the WTO and the dispute settlement system in encouraging trade and compliance with agreements; and offers some general thoughts on the impact of shifting mass opinion on the virtue of trade agreements and other stumbling blocks the WTO faces.

As the World Trade Organization begins its third decade, its future is less certain than at any point in its history. While there is no move to dismantle the organization, the initial expectation that the WTO would be the fulcrum for future international trade agreements has not been met. At best, we can say that its tenure has had mixed results. On one hand, the organization continues to be an adjudication focal point, with nations using panel processes when there is contestation over rule interpretation. But more problematic given the function of the organization, the legislative arm of the WTO is moribund. If we were to compare the first two decades of the WTO with that of its predecessor organization, the General Agreement on Tariffs and Trade, the WTO would appear lackluster. This essay examines the scholarly literature on the trade regime and argues that this pessimism may be misplaced.