Bilateralism vs. multilateralism: Role of political economy for the prospect of multilateral free trade

Abstract In this paper, we use a unified framework of competing exporters and competing importers models where political biases in both exporting and import‐competing sectors influence governments' decisions in trade agreement formation and external tariff setting. Using an endogenous trade agreement formation model, we show that the relative strength of political biases in import‐competing and exporting sectors are pivotal in determining the free‐riding incentives, exclusion incentives and whether the ability to form free trade areas acts as building or stumbling blocks towards multilateral free trade. When the political biases toward exporting and import‐competing sectors are sufficiently weak, the ability to form free trade agreements acts as strong building blocks toward free trade. However, when the political bias towards exporting sectors is at the intermediate range and political bias towards import‐competing sectors is sufficiently strong, the ability to form free trade agreements acts as strong stumbling blocks.