Abstract
International trade agreements are considered to be beneficial for their members, both from the game-theoretic perspective and in the data. Yet, very few country pairs in the world have agreed to full trade liberalization. This paper provides an explanation to why this is the case, focusing on the very nature of trade negotiations. We model a real-world feature of trade negotiations, the so-called "red lines"---the concessions countries are willing to make to achieve a reduction in a trade barrier,---as a game with strategic side payments. These mutual contingent concessions alter the negotiation outcomes such that the agreement will not always be possible. We derive conditions under which efficient tariffs can be reached in a general framework. We further explore canonical models of trade, and link their structures to the insights of the general framework.