International trade agreements between countries of asymmetric size

This paper analyzes how changes in the structure and environment of trade agreements between a small and a large country affect the efficient frontier of those self-enforcing agreements and hence, negotiation outcomes. Using the autarky punishment instead of the interior Nash punishment may provide the small country with greater bargaining power. Negotiating direct transfers under free trade instead of reciprocal tariff reductions improves the worst possible negotiation outcome for the small country. The existence of irreversible investment may strengthen (weaken) the small country's bargaining power under the interior Nash (autarky) punishment scheme. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: F02; F13; F15.