Trade Policy Implications of a Changing World: Tariffs and Market Power

ABSTRACT

A major economic rationale for trade agreements is limiting mutually harmful terms-of-trade externalities. We analyse the impact of market power on tariff commitments of original and acceded WTO members. As countries grow, their market power in different sectors can change in unforeseen ways. To quantify the economic significance of our estimates, we compare actual and predicted tariff commitments under current market power. We find that tariff cuts required to reflect current economic conditions would amount to up to $26.4 billion – nearly 10% of global tariff costs. In the past, the GATT/WTO system has updated tariff commitments through periodic ‘rounds’, and our findings support the long-overdue revival of the WTO’s negotiation function.

KEYWORDS:

• Trade agreements
• trade policy
• terms of trade
• WTO

JEL CLASSIFICATION:

• F11
• F13
• F53

Data availability statement

Data provided by UN Comtrade and WTO under licence or by permission and shared upon request to the corresponding author exclusively for the purpose of replication.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Terms-of-trade theory was first formalised by Johnson (1953). Other economic rationales for trade agreements include political economy considerations, making commitments credible, internalising production relocation externalities and reducing trade policy uncertainty. Here, we do not purport to evaluate the merits of one theory over another, but simply illustrate empirically the implications of the widely cited terms-of-trade theory.

2 Non-ad valorem tariffs are excluded from the dataset.

3 See Table 3A for their benchmark results.

4

$\sum _{\mathit{ic}}\left({\tau }_{IC}^{WTO}-{\tau }_{IC}^{WTO,CF}\right)\times V_{ic}^{Pr\mathrm{esent}}$