Forbearance in optimal multilateral trade agreements∗

I present a theory of optimal multilateral trade agreements with public political shocks. I show that “forbearance” where one country withholds retaliation when its trading partner receives a shock is a feature of an optimal agreement. This provides a rationale for countries not acting on retaliatory rights granted under GATT. I show that there is a limit to forbearance allowable in a self-enforcing agreement, which is increasing in the number of countries, the discount factor, and the size of the export sector. In this sense, larger trade agreements with greater trade flows provide more insurance against political shocks. JEL Classification: C73, D74, F10