Cap and Escape in Trade Agreements

American Economic Journal-Microeconomics

Cap and Escape in Trade Agreements
Mostafa Beshkar, Eric W. Bond
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We characterize the optimal tariff bindings and the escape clause in a trade agreement among asymmetric countries that are subject to idiosyncratic political-economy shocks. We assume that shocks are private information, and that escape clauses allow the use of a costly monitoring technology to reveal the true value of the private information. We define a concept of convergence of tariff preferences, and show that bindings are higher for countries whose preferences are less convergent and for countries with a lower degree of market power. We also show how the introduction of contingent protection will substitute for tariff overhang, and establish that a sufficient condition for contingent protection to eliminate the use of tariff overhang is that tariff preferences be globally convergent.


Beshkar, Mostafa, (Author), Bond, Eric W., (Co-Author), "Cap and Escape in Trade Agreements", No, Published. American Economic Journal-Microeconomics. Submitted: 2015, Accepted 2016, Published 2017.