some other objective (that is freer trade, unweighted domestic welfare, or
global welfare). In fact, such an outcome seems likely in many cases, as our
empirical examples illustrate.
The key general lesson from this analysis is that, when designing trade
agreements that restrict policies of individual governments, care should be
taken to recognize the endogenous nature of policy determination, and things
should not be taken as given when they are not. In the context of multinational
agreements, rules should be chosen with due regard to incentive compatibility
if the objective is to force policies to adjust towards freer trade and enhanced
domestic and global social welfare. In a GATT agreement that imposes few
restrictions on domestic policy use, and partial restrictions on instruments
used at the border, there is ample scope for perverse outcomes and good
reason to expect them to proliferate.
The CUSTA took effect on January 1, 1989. The United States, Mexico, and Canada signed NAFTA on December 17, 1992, and it took effect on January 1,
1994. The Uruguay Round Agreements established the new WTO which replaced
GATT. Negotiations for the new GATT/WTO Agreement were concluded in Marrakesh on April 15, 1994 and the agreement is to be implemented in 1995.
In practice, what seems to happen in some cases is that the domestic
production quota is fixed and a price is established using a cost-of-production
formula, with the import quota being chosen aiming to clear the market at the
predetermined price. At this stage of the analysis, the question of how the import
and domestic quotas are chosen is put aside and, regardless of how they are chosen,
it is the total availability that determines price.
3 The same outcome could be derived from a self-willed government (SWG)
model, in which the government actively maximizes an objective function, or from
a clearinghouse government (CHG) model in which the government is passive and
the policy is driven by competition among groups (for example, see Alston and Carter 1991). 4
With some other combinations of welfare weights, not shown in the figure,
domestic (and global) welfare rises initially but eventually falls as the MAR
percentage progressively increases.
Alston, J. M., and
C. A. Carter. 1991. "Causes and Consequences of Farm Policy". Contemporary Policy Issues IX: 107-121.
Alston, J. M., and
J. Spriggs. 1994. "Endogenous Policy and Supply Management in
a Post-GATT World". Invited paper presented at the conference on "Supply
Management in Transition Towards the 21st Century, " Macdonald Campus of
McGill University, Ste-Anne-de-Bellevue, Québec, Canada (revised January, 1995).
Questia, a part of Gale, Cengage Learning. www.questia.com
Book title: Regulation and Protectionism under GATT:Case Studies in North American Agriculture.
Contributors: Andrew Schmitz - Editor, Garth Coffin - Editor, Kenneth A. Rosaasen - Editor.
Publisher: Westview Press.
Place of publication: Boulder, CO.
Publication year: 1996.
Page number: 62.
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