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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
Author(s) -
Toshimitsu Tsuyoshi
Publication year - 2014
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12119
Subject(s) - subgame perfect equilibrium , tariff , economics , time lag , international economics , commercial policy , nash equilibrium , international trade , free trade , lag , microeconomics , computer network , computer science
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 P areto improving for the importing and exporting countries.