Pelc, Krzysztof J. (2013) The Cost of Wiggle-Room: Looking at the Welfare Effects of Flexibility in Tariff Rates at the WTO. International Studies Quarterly, doi: 10.1111/isqu.12037
© 2013 International Studies Association
There is considerable variation in the depth of countries’ commitments at the World Trade Organization (WTO). While WTO members apply tariffs on imports at roughly comparable levels, the maximum levels allowed on these tariffs vary dramatically, leaving some members with far more flexibility to raise trade barriers overnight. Some countries have argued that such “binding overhang” is harmless unless it is exploited, while other countries disagree. This paper is the first attempt to empirically assess the effect of binding overhang on trade flows. I argue that the mere existence of binding overhang has a strongly negative effect on trade, through the way in which it muddles expectations. Using data at the 4-digit harmonized system product level, covering the WTO membership from 1995 to 2008, I demonstrate that the cost in terms of lost trade resulting from the ability to legally raise a tariff by one point is tantamount to nearly half the cost of having done so. In sum, WTO membership is, by itself, no panacea. Negotiating greater tariff flexibility can water down a country’s legal commitments and significantly reduce the benefits flowing from the institution.