Trade agreements with domestic policies as disguised protection

Abstract

WTO rules prohibit "disguised protection" in the form of domestic policies. How then do governments cooperate over trade and domestic policies when none can verify whether a nation's domestic tax reduction is a protective measure or a reaction to a production externality? In this paper, each government privately observes whether a production externality associated with its import-competing good is high or low. This paper finds that in an optimal agreement, disguised protection with domestic policies is never used by governments with a high externality, and is never commonly realized. Moreover, in an optimal agreement, tariffs may be conditional on domestic policies.

Disguised Protectionism, Global Trade Rules and Alien Invasive Species

“…A similar result appears inBagwell and Staiger (2001) Prop 1-the terms of trade seeking "does not distort the policy mix"-and inLee (2007).…”

Is the WTO Passé?

“…In the StaigerSykes model, the domestic government 82 Lee (2007) considers a related model but with the important difference that each government is privately informed about the magnitude of the domestic production externality in its country. As Lee shows, in this case it may be optimal to distort the tariff in order to limit the potential for disguised protectionism, which occurs when a government misrepresents its information by selecting a low production tax even though the externality cost is high.…”

The World Trade Organization: Theory and Practice

“…(Recent theoretical papers include Ederington 2001;Bond & Park 2002;Chisik 2003;Agur 2008;Bagwell & Staiger 2003, 2005aLimao 2005;Lee 2007;Zissimos 2007;Klimenko et al 2008;Martin & Vergote 2008;Bagwell 2009;Beshkar 2009;Park 2009;and Limao & Saggi 2008. Related empirical work includes Prusa &Skeath 2001 andBlonigen &Bown 2003.…”