Large Costs, Small Benefits: Explaining Trade Dispute Outcomes

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Abstract

The United States frequently engages in negotiations with its trading partners over expanded market access for American firms. Although many of these negotiations involve markets worth millions or even billions of dollars, sometimes government officials bargain long and hard over issues that were never predicted to result in substantial benefits. For example, the United States held negotiations with Japan for more than 30 years over increased market access for American apples. These negotiations were ultimately carried to the highest levels of government, discussed at international conferences, and even ruled on by the World Trade Organization, yet estimates of the potential market for foreign apples never exceeded $15 million. Such protracted negotiations in this sector do not make sense from the perspective of expected utility theory but can be explained by prospect theory. Apple negotiations came to represent a spiral model for both the United States and Japan. As each side viewed its own losses as deepening over the course of negotiations, each became caught in a prospect theory spiral of actions and became willing to take even riskier actions in an attempt to recoup losses.

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