When does coordination for free trade regimes fail?

Abstract

This paper examines why the recent efforts to arrange free trade regimes have failed repeatedly focusing on the increased uncertainties in economic fundamentals and the asymmetric political economic characteristics of trading countries reflected in the hawkish trade retaliatory tendencies. We demonstrate that, under informational barriers due to economic uncertainties, a slight negative change in economic fundamentals as well as the signals about the economic fundamentals can lead to the collapse of free trade regimes. Moreover, the fear of a trading partner's deviation to protectionist policies might trigger preemptive protectionist measures resulting in a trade war when trade policies show strategic complementarity. However, a free trade regime is more likely to be sustained when it is commonly known that each country has strong symmetric retaliatory tendencies in case trade friction occurs. Nonetheless, if the asymmetry in retaliatory tendencies of trading countries increases the preemptive incentive, a free trade regime is more likely to collapse to a trade war. (C) 2012 Elsevier B.V. All rights reserved.