The earlier version of this paper was based on Toshimitsu (, ).
The Role of GATT/WTO as a Commitment Device in the Presence of a Time Lag: Free Trade, Time-consistent Tariff Policy and Market Size
Article first published online: 20 JAN 2014
© 2014 John Wiley & Sons Ltd
The World Economy
Volume 37, Issue 7, pages 980–994, July 2014
How to Cite
Toshimitsu, T. (2014), The Role of GATT/WTO as a Commitment Device in the Presence of a Time Lag: Free Trade, Time-consistent Tariff Policy and Market Size. World Economy, 37: 980–994. doi: 10.1111/twec.12119
- Issue published online: 20 JUL 2014
- Article first published online: 20 JAN 2014
We consider whether a free trade policy is superior to tariff policies in the presence of a time lag between production and trade decisions. We show that the preferable choice between a free trade policy and a time-consistent tariff policy depends on the market size of the importing country. However, because a free trade policy itself is not necessarily credible in the presence of a time lag, the importing country requires an international organisation such as GATT/WTO as a commitment device. Accordingly, employing a non-cooperative game approach, we analyse under what conditions becoming a member of such an international organisation is a subgame perfect Nash equilibrium and show that free trade under the GATT/WTO regime is Pareto improving for the importing and exporting countries.