As the general framework described above suggests, theWrst step in analyzing atrade organization is to identify the fundamental problems it needs to address.
International trade presents a classic strategic problem, often modeled as a
Prisoners’ Dilemma. Impediments to trade are costly, decreasing the aggregate
welfare of states by increasing costs to consumers, depriving exporters of markets,
and generally distorting the allocation of economic resources. Thus, decreasing
impediments to trade oVers aggregate welfare beneWts for states. Jointly moving
away from a situation of high levels of protection for domestic producers is a
Pareto-improving move for states as aggregate entities. However, this does not
mean that every individual within these states will beneWt from freer trade. In
particular, domestic producers who will be forced into increased competition from
imports will not beneWt from trade liberalization, and will lobby the government
for continued protection (Grossman and Helpman 1994 ). Thus, governments face
continual pressure to renege on the terms of trade agreements, providing protec-
tion for injured domestic actors.
International trade institutions thus have to face two fundamental problems.
First is to structure and facilitate international bargaining to move toward
reduction of trade barriers. While small states—those who cannot inXuence
world prices because of the small size of their economies—exercise little bargaining
power and can do best by unilaterally removing trade barriers, large states bargain
hard to gain advantages for their exporters in exchange for reducing their own
levels of protection. In fact, ‘‘empowered’’ exporters are typically the most import-
ant force driving negotiation of reduced levels of protection (Gilligan 1997 ). By
creating a framework in which negotiators can agree on which trade barriers to
reduce and by how much, trade institutions can do much to enhance international
Xows of goods and services. The second major problem, however, is to set up
mechanisms to encourage states to live up to the terms of these agreements.
Because of the constant political pressure to deviate from the terms of liberalized
trade, governments are tempted to impose new barriers or simply fail fully to
implement the liberalization measures agreed on. As the framework described
above suggests, we are unlikely to see trade institutions directly empowered to
enforce agreements in order to overcome these temptations. However, they can
nevertheless play a substantial role in facilitating decentralized enforcement.
We see trade institutions developing strong monitoring and dispute-resolution
mechanisms, and standards for punishment of those who defect from agreements,
in response to these challenges.
ConsiderWrst the bargaining problems associated with international trade. Kyle
Bagwell and Robert Staiger ( 1999 )oVer a general economic theory of the structure
of the GATT/WTO based on an analysis of the bargaining problem. They begin
from the observation that the only feasible and self-enforcing bargains on inter-
national trade are those that preserve the existing terms of trade: if deals change the
terms of trade, at least one of the parties to the bargain will refuse to live up to its
660 lisa l. martin