Politically Acceptable Trade Compromises Between The EC and The US: A Game Theory Approach

Abstract

A model is developed to quantify the special status of agriculture in the US and the EC trade negotiations. The role of special interests are measured by a policy goals function (PGF) whose weights are estimated for each special interest group. The analysis searches for mutually acceptable, mutually advantageous trade agreements between the US and the EC using a partial equilibrium world trade model coupled with game theory. Results suggest that it is in the best interest of the US (resp. EC) 'for the EC (resp. US) to liberalize whi1e the other follows the status quo policies of 1986. Mutual gains in PGF values to both countries pursuing "large" liberalizations are unlikely to exist, although "small" liberalizations may give rise to "small" mutual gains. Altering each country's action space, and permitting compensatory payments to the most influencial groups yields trade liberalization, but free trade does not result.

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