Free Trade, Time-Consistent Tariff, and Market Size: The Role of GATT/WTO as Commitment Devices

Tsuyoshi Toshimitsu

No 79, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: We examine whether free trade is superior to tariff policy if the government of an importing country cannot precommit to an ex ante optimal tariff rate in the presence of a time lag between production and trade decisions. Based on a simple partial equilibrium model with an export monopoly, we show that the preferable choice between free trade and a time-consistent tariff policy depends on the market size of the importing country. More specifically, if the market size is larger than a certain level, the importing country prefers free trade to the time-consistent tariff policy. However, because a free trade policy is not credible in the presence of a time lag, the government of the importing country requires international organizations and rules such as GATT/WTO as commitment devices. Thus, using a game theoretic approach, we analyze under what conditions becoming a member of the international organizations is a subgame perfect Nash equilibrium and show that a free trade policy under the GATT/WTO regime is Pareto improving for the importing and exporting countries.

Keywords: free trade; time-consistent tariff; time lag; market size; GATT/WTO (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2012-01, Revised 2012-01
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://192.218.163.163/RePEc/pdf/kgdp79.pdf First version, 2012 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:79

Access Statistics for this paper

More papers in Discussion Paper Series from School of Economics, Kwansei Gakuin University Contact information at EDIRC.
Bibliographic data for series maintained by Toshihiro Okada (toshihiro.okada@kwansei.ac.jp).