Abstract:

In this dissertation, I examine escape clauses (safeguards) in international trade agreements. I present a game-theoretic model to argue that escape clauses allow rent-seeking government officials to benefit from the best that two different trade policy rules have to offer: irrevocable commitment to free trade and discretionary trade policy. Under irrevocable commitment, the government benefits from efficient capital allocation. Under a discretionary trade policy, the government benefits from "selling" policies to import-competing sectors. A trade agreement with an escape clause is a conditional commitment that enables the government to benefit from commitment and discretion simultaneously . From the point of view of rent-seeking politicians, and contrary to our intuition, a conditional commitment is superior to both full discretion and irrevocable commitment.

In the Nash equilibrium, the ease with which the escape clause can be activated depends on the domestic bargaining strength of the governments in the agreement. Also contrary to intuition, when lobbies are very strong (in the sense that they can appropriate a larger proportion of the extra profits generated by trade barriers) the government has a greater incentive to commit to free trade. But when the government is very strong vis-?-vis private interests, it prefers an agreement with an escape clause that can be used more frequently.

The escape clause increases the long-term benefits of complying with the agreement. Self-enforcement can be obtained through a reputation mechanism. The government fears that it would lose its reputation for compliance if it violated the agreement because investors would misallocate capital and eliminate the gains of the agreement. In addition, the reputation mechanism shows that "ex-ante" lobbying is redundant.

I empirically test the model, comparing the escape clauses of a sample of agreements and indicators of corruption and bribery. I find that the frequency with which an escape clause can be used is positively correlated with domestic bargaining strength of the government. The results are consistent with the predictions of the formal model.