Reciprocity, a mutual or reciprocal reduction in tariffs, is a key feature of trade agreements between large countries. Explain why reciprocity is a necessary feature for a trade agreement to yield higher welfare to both parties. Can a trade agreement be sustainable (or “self-enforcing”) if it is not characterized by reciprocity?
Following McLaren, let us consider two large countries, A and B which are symmetric both countries produce goods a and b, but A has a comparative advantage in the production of a whilst B has a comparative advantage in the production of b. To placate the domestic industry country A has an incentive to impose a tariff on good b which imposes a terms of trade loss for B and efficiency loses for both countries, whilst B has an incentive to impose a tariff on good a causing a terms of trade loss for A and efficiency losses for both country. [...]