Forbearance in Optimal Multilateral Trade Agreements

Abstract

I present a theory of optimal multilateral trade agreements with public political shocks. I first show that "forbearance"-- where one country withholds retaliation when its trading partner receives a shock-- is a feature of an optimal agreement. This provides a rationale for countries not acting on retaliatory rights granted under GATT. Second I show that there is a limit to forbearance allowable in a self-enforcing agreement. This limit is increasing in the number of countries in the agreement, increasing in the common discount factor, and increasing in the size of the export sector.