, Volume 4, Issue 4, pp 329-359

Political-economic problems in trade capacity building

Rent the article at a discount

Rent now

* Final gross prices may vary according to local VAT.

Get Access

Abstract

Theoretically, trade capacity building should contribute to export-led growth and support liberal economic policies. Unfortunately, it often fails to meet this ideal due to resource misallocation, misplaced focus on existing obligations, and donor-driven implementation. This article presents a formal theory of political-economic problems in trade capacity building. I analyze trade liberalization as a repeated game with imperfect public monitoring between a developed and developing country. Modeling trade capacity building as an investment by the developed country, I show that it suffers from two problems. First, the need to enforce trade liberalization drives resource misallocation: costly projects are implemented only to build commitment capacity while others are not implemented because they encourage protectionism. Second, donor interests distort trade capacity building. Counterintuitively, if the donor can seek compensation from the recipient when it violates international trade law, it sometimes refuses to invest in low-cost trade capacity building while funding projects that hurt the recipient.