Tariff Binding and Overhang: Theory and Evidence

Abstract

We study optimal tariff binding agreements among asymmetric countries that are subject to idiosyncratic political-economy shocks. We find that the optimal tariff binding of a sector is decreasing in the importing countries international market power in that sector. Moreover, under an optimal agreement, a tariff binding overhang is on average greater in sectors with lower international market power. Using the WTO tariff bindings and the applied tariffs of the WTO member countries, we find strong empirical support for our predictions.