Post-Doha Trade Policy Options for a Small Country

Abstract

This paper uses a partial equilibrium model of two small countries, within a large world economy, implementing reciprocal tariff cuts on each other’s exports in a regional trade agreement (RTA) and compares the effects with unilateral most favoured nation (MFN) tariff cuts. The reciprocal cuts are shown to be more likely beneficial to a country if the partner country’s trade is larger. The welfare effects of a country’s own tariff cut on imports are also compared to the effects on its welfare of the partner country’s tariff cut on its exports. If tariff levels are low, the latter is seen to be larger than the former. Implications of the analysis are that, if multilateral trade liberalisation is unlikely, then small countries should seek to form RTAs with countries larger than themselves. In addition, to assure that they have something to offer in such arrangements, they should not go too far in unilaterally reducing their MFN tariffs.