Domestic political competition and binding overhang in developing countries

James Lake and Maia Linask

No 1503, Departmental Working Papers from Southern Methodist University, Department of Economics

Abstract: Governments, especially in developing countries, routinely practice binding overhang (i.e. setting applied tariffs below their binding WTO commitments) and frequently move the applied tariff for a given product up and down over the business cycle. Indeed, counter to conventional wisdom, applied tariffs are pro-cyclical in developing countries. We explain this phenomenon using a dynamic theory of lobbying. The government is captured by import-competing industries (or exporters), whose applied tariff concessions in response to lobbying threats by exporters (import-competing industries) cause fluctuations in applied tariffs and, thus, binding overhang. Applied tariffs are pro-cyclical when the government is captured by import-competing industries because these industries concede lower tariffs to exporters during recessions given recessions lower the opportunity cost of lobbying and thereby generate a stronger lobbying threat.

Keywords: Binding overhang; lobbying; tariff bindings; applied tariffs (search for similar items in EconPapers)
JEL-codes: C73 D72 F13 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-cdm, nep-int and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:smu:ecowpa:1503

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