This paper presents a theory of optimal multilateral trade agreements with public political shocks. Optimal multilateral agreements exhibit "forbearance'' – where one country withholds retaliation when its trading partner receives a shock. This provides a rationale for countries not acting on retaliatory rights granted under GATT. There is a limit to forbearance allowable in a self-enforcing agreement. This limit is increasing in the number of countries in the agreement, 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.
