36 THE POLITICAL ECONOMY OF THE WORLD TRADING SYSTEM

The imbalance in the strength of political forces favouring and opposing liber-
alization provides a possible rationale for the pursuit of reciprocal trade negoti-
ations. Rather trivially, although a (small) country will benefit from liberalizing
its
trade, it is even better if trading partners do the same. More important from a
political economy perspective is that by making liberalization conditional on
greater access to foreign markets, the total gains of liberalization increase and
in
the process liberalization becomes more feasible politically. Being able to point
to
reciprocal, sector-specific export gains may be critical in mobilizing domestic
political support for liberalization at home. By obtaining a reduction in foreign
import barriers as a quid pro quo for a reduction in domestic trade restrictions,
specific export-oriented domestic interests that will gain from liberalization have
an incentive to support it in domestic political markets. This political economy
rationale for reciprocal negotiations is now generally accepted as a basic explan-
ation for the existence of trade agreements and the WTO.

Economists often stress the importance of the terms of trade in providing a

theoretically consistent rationale for the formation of trade agreements. The
argument is that countries negotiate away the negative terms-of-trade external-
ities that would be created by the imposition of trade restrictions in partner
countries (Bagwell and Staiger, 2002). Questions can be raised regarding the
empirical relevance of this explanation for small countries that cannot affect
world prices (in the terms of trade sense). Part of the answer may be that most
products that are traded are differentiated, potentially giving small countries
some market power (as what matters is not the size of the country, but the degree
to which the product(s) of the country are substitutable and the number and cost
of alternative suppliers of substitutes). However, for low-income countries that
export mostly commodities the empirical relevance of such product differentiation-
based market power is likely to be very limited. More important, governments of a
small country may want to be a member of the WTO because its exporters will
benefit from the low tariffs that large WTO member countries negotiate recipro-
cally with one another but must then extend to all other members under the
MEN rule.

This explanation can only be partial, however, because it does not explain why
large countries want small countries to join the WTO. It may be that in practice
large countries simply do not care, as small countries cannot affect the terms of
trade. An implication is that trade agreements will tend to reflect the concerns of
large countries, and that reciprocal exchanges of trade policy commitments will be
concentrated among large countries. To a significant extent this is indeed what
occurs. However, at the same time large countries have supported expansion of the
membership of the WTO, and negotiated bilateral trade treaties and preferential
access arrangements with small countries. This is difficult to square with the
terms-
of-trade explanation for trade agreements, suggesting other motivations must be
relevant as well.