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Second, and perhaps most important, is the neglect of political economy considerations.  At the domestic level, an effort to pursue welfare gains through preferences is likely to be captured by special interests and turned into an inefficient redistributionist programme.  In this context, certain simulations carried out by Deltas and Evenett (1995) using models similar to those in the papers referred to above are revealing.  They find that price preference policies generate at best only marginal improvements in social welfare.  However, even small price preferences are found to generate substantial increases in the domestic firms' expected profits at the expense of not only foreign firms, but also domestic consumers and taxpayers - so the domestic distributional consequences of preferences are substantial.  Deltas and Evenett (1995, p. 1) conclude that their results "cast doubt on the validity of the claim that nations are reluctant to join the GPA because of the welfare losses associated with foregoing the use of price preferences." Rather, they find that it is the large economic rents generated by preferences, concentrated in those domestic firms that bid for contracts, that create a powerful constituency opposed to assuming non-discriminatory disciplines.

At the international level, preferences may have a beggar-thy-neighbour component which has led to retaliation and mutually harmful non-cooperative outcomes.16  For instance, in the McAfee and McMillan (1989) model, in so far as the preference policy creates a likelihood of the relatively high-cost firm actually winning the contract, it could lead to a misallocation of global resources, and therefore to a reduction in global welfare.  In fact, the GPA is best seen as an agreement to cooperate in order to avoid such sub-optimal outcomes.17

    (The European telecommunications equipment industry is a good example of this kind of situation.

    (Flatters and Lipsey (1983, pp. 47-49) have shown how individual governments may be trapped into a prisoner's dilemma situation, where each acting in isolation pursues discriminatory policies that collectively damage the interests of all.


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