Trade Agreements with Domestic Policies as Disguised Protection

• Main Author: LEE, Gea Myoung
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2007
• Subjects: Trade agreement; Private information; Domestic policy; Disguised protection; International Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/78; https://ink.library.smu.edu.sg/context/soe_research/article/1077/viewcontent/TradeAgreements_DomesticPolicies_2007.pdf
• Institution: Singapore Management University

WTO rules prohibit “disguised protection” in the form of domestic policies. How then do governments cooperate over trade and domestic policies when none can verify whether a nation's domestic tax reduction is a protective measure or a reaction to a production externality? In this paper, each government privately observes whether a production externality associated with its import-competing good is high or low. This paper finds that in an optimal agreement, disguised protection with domestic policies is never used by governments with a high externality, and is never commonly realized. Moreover, in an optimal agreement, tariffs may be conditional on domestic policies.