Tariff binding and overhang: Theory and evidence

Most market access commitments under the WTO are in the form of bindings on applied tariff rates. We observe two important regularities in the data. First, applied tariffs are often lower than the bound tariffs, providing governments with substantial policy flexibility. Second, the extent of flexibility varies substantially across sectors and countries. In a sharp contrast to the prediction of standard trade agreement models, we observe a strong negative correlation between tariff commitments and measures of import market power. We model the trade-off between discipline and flexibility in the design of trade agreements, and argue that recognizing this trade-off is the key to explain the observed patterns in the tariff binding commitments and applied tariffs under the WTO.