Cap and Escape in Trade Agreements†

Cap and Escape in Trade Agreements† AbstractWe 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. (JEL D86, F11, F13, F41) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

Cap and Escape in Trade Agreements†

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Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
1945-7685
D.O.I.
10.1257/mic.20160218
Publisher site
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Abstract

AbstractWe 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. (JEL D86, F11, F13, F41)

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: Nov 1, 2017

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