Cap and Escape in Trade Agreements
American Economic Journal: Microeconomics
vol. 9,
no. 4, November 2017
(pp. 171-202)
Abstract
We propose a model of flexible trade agreements in which verifying the prevailing contingencies is possible but costly. Two types of flexibility emerge: contingent protection, which requires governments to verify the state of the world, and discretionary protection, which allows governments to set tariffs unilaterally. The structure of the GATT/WTO agreement provides these two types of flexibility through a mechanism that we call Cap and Escape. Governments may choose tariffs unilaterally below the negotiated cap, but escaping from the cap requires state verification. We show that this framework explains key features of the GATT/WTO agreements, including the substantial variation across sectors and countries in the level of negotiated tariffs, and the rate at which different flexibility measures are used.Citation
Beshkar, Mostafa, and Eric W. Bond. 2017. "Cap and Escape in Trade Agreements." American Economic Journal: Microeconomics, 9 (4): 171-202. DOI: 10.1257/mic.20160218Additional Materials
JEL Classification
- D86 Economics of Contract: Theory
- F11 Neoclassical Models of Trade
- F13 Trade Policy; International Trade Organizations
- F41 Open Economy Macroeconomics
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