We characterize the optimal tariff bindings and the escape clause in a trade agreement among asymmetric countries that are subject to idiosyncratic political-economy shocks. We assume that shocks are private information, and that escape clauses allow the use of a costly monitoring technology to...

Purpose – This chapter examines how preferential liberalization between a pair of countries affects the terms of trade and welfare of the liberalizing countries and on the rest of the world (ROW). We adopt a model with symmetric countries that generalizes previous work by relaxing assumptions...