Competitive Liberalization: A Tournament TheoryBased Interpretation

1
Competitive Liberalization A Tournament
Theory-Based Interpretation

• Simon J. Evenett, www.evenett.com

2
Motivation

• From the USTRs 2005 Trade Policy Review.
• Four years ago, the Bush Administration
  initiated a new strategy to pursue reinforcing
  trade initiatives globally, regionally, and
  bilaterallyBy pursuing multiple free trade
  initiatives, the United States has created a
  competition for liberalization, launching new
  global trade negotiations, providing leverage to
  spur new negotiations and solve problems, and
  establishing models of success in areas such as
  intellectual property, e-commerce, environment
  and labor, and anti-corruption. page 1.
• Comment on what is actually new in the above
  statement.

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Destler on Competitive Liberalization

• Zoellicks main immediate use of TPA, however,
  was for a series of bilateral and regional free
  trade agreements.
• Quotes a 2002 speech by Amb. Zeollick in which
  the latter states the United States is creating
  a competition in liberalization, placing America
  at the heart of a network of initiatives to open
  markets The USA would proceed with countries
  that are ready to open their markets and success
  would create pressure on others.
• Zeollick had long seen such trade agreements
  as having geopolitical as well as trade
  significance.
• Comparative treatment of Australia and New
  Zealand.

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Three aspects of Competitive Liberalization

• Stimulating a competition for access to the U.S.
  market.
• Greater role for foreign and security policy in
  U.S. trade policy-making.
• Inclusion of non-market access provisions in
  trade agreements.
• Some preliminary comments.

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Summary of findings

• Demonstrate that a standard tournament model
  enables the USA to include foreign policy
  considerations at no cost in terms of market
  access elicited from the trading partners.
• Not every tournament has this feature.
• Foreign policy considerations matter, though, for
  the design of the PTAs offered and can account
  for exemptions and the inclusion of deliberately
  controversial non-market access provisions.
• If the discretion retained for foreign policy
  considerations becomes large enough, the losing
  contestants welfare may actually go down, even
  though its PTA with the USA raises that trading
  partners utility.

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Rank-order tournament models

• Examine incentives created by relative
  performance systems are used to allocate scarce
  top slots.
• Basic 2-period tournament model (Lazear 1995)
• Employer announces wages W1 and W2.
• Employees choose unobserved effort levels. Then,
  employer assigns employee to jobs according to
  observed relative output performance.

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Adapting tournament models

• USA runs a contest for 2 trading partners,
  solicits market access offers from them, and
  awards 2 PTAs.
• Compensation is in form of extent of access to
  the USA marketnot financial compensation.
• All three countries make politically painful
  market access offers.
• Market access offers can be financed in 3 ways.
• As each contestants market access offers are
  observed, what is the source of uncertainty?

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The model

• In period 1 USA announces its intention to offer
  2 PTAs at end of period 2, giving the most
  valuable PTA (worth W1) to contestant with
  highest foreign/security policy-adjusted market
  access offer. Loser gets a different PTA worth
  W2.
• In period 1 USA does not know what foreign policy
  concerns will be important in period 2 but
  commits to take them into account.
• In period 2 Contestants choose market access
  offer before foreign policy outcomes are known.
  Once the latter are known, USA awards W1 and W2.

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Solving the model...backwards
1 receives W1 if
FOC for 1
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Symmetric Nash Eq in period 2
IC
PC
IC, PC ?
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Solving the model in period 1
FOC
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Properties of the equilibrium

• Equilibrium market access offers (m) unaffected
  by foreign policy considerations.
• Moreover, the equilibrium market access offers
  (m) are the same as in a deterministic benchmark
  case where no foreign policy considerations were
  present.
• But maintaining discretion for foreign policy
  matters as
• g(0)??W1-W2?
• W2lt0 if

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Designing PTAs to reduce W2

• Think of W2 as being the sum of two components,
  ?Y ?Z
• The USAs agreement with the losing contestant
  (?Y)
• More US sectors exempted from its market access
  offer.
• Longer transition periods before market access
  improves.
• Include controversial non-market access
  provisions.
• Caveat Possible limits to reducing ?Y namely,
  ?Ygt0.
• The USAs agreement with the winning contestant
  (?Z)
• Ensure losers exports fall with this agreement.

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Recap of main findings so far

• This tournament enables the USA to include
  foreign policy considerations at no cost in terms
  of market access elicited from the trading
  partners.
• Not every tournament has this feature.
• Foreign policy considerations matter, though, for
  the design of the PTAs offered and can account
  for sequencing, exemptions, and inclusion of
  deliberately controversial non-market access
  provisions.
• If retaining discretion for foreign policy
  considerations becomes large enough, the losing
  contestants politicians utility may actually go
  down, even though its PTA with the USA raises its
  politicians utility.

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Comparative statics
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Does a tournament perspective add value?

• Emphasises relative as well as absolute treatment
  of contestants encourages analysts to compare
  PTAs, not just evaluate single PTAs.
• Points to the role that non-trade policy
  objectives can play in determining relative
  treatment of contestants.
• Highlights the importance of the extent of
  domestic pain is needed to finance a market
  access offerwith the suggestion that there is a
  clear incentive to exploit opportunities for
  trade diversion.
• Provisions of PTAs and the sources of financing
  market access are not explicitly modelled.
• Departures from symmetry and risk-neutrality are
  feasible but messy.