How WTO commitments tame uncertainty

This paper studies how WTO rules and flexibilities shape its members’ trade policy responses to import shocks. Guided by a cost–benefit analysis model and using a unique database of tariff bindings for all WTO countries over the 1996–2011 period, we show that WTO commitments do affect members’ trade policy. More stringent bindings reduce the likelihood of responding to import shocks by raising tariffs. In addition, consistent with cooperative behaviour, fear of retaliation also reduces the likelihood of tariff increases. In a counterfactual scenario where WTO members can arbitrarily increase tariffs, they are 4.3 times more likely to do so than under current bindings. The upshot is that WTO commitments contribute to a more stable trade policy environment.