Trade Agreements and Endogenously Incomplete Contracts: A Political Economy Approach

We develop a political economy model of trade agreements that incorporates contracting costs and uncertainty. The model delivers simple expressions for policy bindings with parameters relating to trade shocks and to political demand shocks. We identified conditions under which the trade volume is positively associated with the payoff of restricting production subsidy/consumption tax. Our model helps explain differential treatment on subsidies, countervailing duties, and the national treatment principle—all key provisions of the current WTO agreement.