“Choked by Red Tape? The Political Economy of Wasteful Trade Barriers” by Peter Neary
University of Geneva
ULB and CEPR
Rational politically-motivated governments may have incentives to impose trade barriers that yield no revenue (red-tape barriers, or "RTBs"), if a trade agreement can constrain tariffs but not RTBs. We show that the extent of tariff liberalization is limited by the need to prevent such wasteful behavior, but that RTBs may nonetheless emerge in equilibrium, if the tariff commitments are not fully contingent. When RTBs are used, they are likely to "choke" trade, implying that the extensive margin is key for understanding the impact of RTBs; but non-prohibitive RTBs can also arise if import demand is sufficiently concave. The frequency of RTBs tends to be higher if the variance in political pressure is higher and if the agreement is re-optimized less frequently. Within the lifespan of an agreement, globalization (a fall in natural trade costs) tends to induce declines in RTBs, but if import demand is sufficiently concave, such declines may get reversed. The main insights apply to both domestic-commitment-motivated as well as terms-of-trade-motivated trade agreements.