Essays on International Trade Agreements Under Monopolistic Competition

This dissertation consists of three essays exploring how trade models with monopolistic competition can help us understand and evaluate the history of domestic policy coordination in the multilateral trading system. Relative to perfect competition, imperfect competition gives rise to new cross-border concerns that governments do not internalize when setting both trade policy and domestic policy. An open question is whether these international policy externalities matter for the design of the multilateral trading system. The first chapter develops the workhorse model for the dissertation and applies it to the evolution of subsidy rules in the multilateral trading system. Why did countries achieve a consensus to impose explicit restrictions on trade-distorting subsidies when the WTO was formed in 1995, but not decades earlier under the GATT? This chapter rationalizes the historical pattern of subsidy rules. Politically-motivated governments benefit from international subsidy restraints only after achieving sufficient cooperation in restraining tariffs. Once tariffs fall, as they did in the 1950s and 1960s, governments prefer to protect domestic sales through international subsidy restraints and countervailing duties rather than to allow consumers to benefit from unfettered subsidization. The second chapter applies the same model to the international coordination of competition policy (antitrust in the United States). In 1948, 53 nations signed the Havana Charter which would have led to the creation of the International Trade Organization and international coordination of competition policy, if the charter had been ratified by the U.S. Congress. Decades later, there is no direct international coordination of competition policy, despite direct coordination in other domestic policies. The theory argues that when countries have noncooperative policies, international coordination toward stronger competition policy can lead to increased consumer welfare. As countries reduce import tariffs, they tend away from coordination on stronger competition policy and toward no coordination or weaker competition policy. The model predicts that if countries were ever to coordinate on competition policy, it would be toward weaker competition policy. The first two chapters each argue that externalities arising under imperfect competition can explain the history of domestic policy coordination, given the actual path of trade liberalization. In contrast, the final chapter evaluates whether the world trading system could have chosen rules that eliminate these externalities. If these externalities could have been eliminated, then monopolistic competition does not create any new fundamental problem for trade agreements to solve. We re-evaluate two claims about international externalities that hold true under perfect competition and are also consistent with the rules and norms of the 1947 GATT: (1) reciprocal trade negotiations can guide countries toward globally efficient policies, such that countries act as if they do not value their ability to manipulate their terms of trade, and (2) globally efficient policies can be preserved by rules that prevent countries from using domestic policies to undermine the market access implied by tariff negotiations. This chapter shows that both claims fail to hold when countries have subsidies for the marginal cost of production and subsidies for firm entry. The source of inefficiency is countries free-riding off of each other's entry subsidies. A market access rule that preserves both a trading partner's home volume and export volume can prevent opportunism in domestic policy choices. The results suggest that the rise of trade in imperfect competition was a factor in limiting the effectiveness of the 1947 GATT rules, long before other challenges for the world trading system like offshoring became predominant