WTO Accession as Commitment: Theory and Evidence from the Choice of Redistribution Policies

Abstract

With 150 member countries, and 29 more currently in the process of accession, the World Trade Organization (WTO) is the most important body governing international trade. However, there is little theory on how governments choose between alternative redistribution policies and no work has been done on the role of the WTO in this choice. In this dissertation we develop a theoretical model that explains how a particular set of WTO rules, the Agreement on Subsidies and Countervailing Measures (SCM), affect the choice and the level of tariffs and subsidies -- two of the most important and frequently observed redistribution policies -- in an acceding country. The WTO SCM agreement guides the subsidies that could be used by a member country, as well as, provides other members with retaliatory measures if these subsidies hurt their interests. We show that, as a country joins the WTO, there will be an increase in its tariffs in those sectors that face a threat of retaliation against subsidies. Our model also offers a new explanation for why a country would want to join the WTO. According to our model, the government would like to be a part of the organization since that would increase its utility through an improved bargaining position vis-à-vis the domestic lobbies. We provide a numerical example to illustrate this channel. In the second part of the dissertation we test the prediction of our theoretical model that the sectors, which after accession face a positive probability of retaliation to subsidization, will experience a switch towards tariffs as an alternative instrument of income redistribution. Since Countervailing Duties (CVD) are the most frequently used measure to retaliate against subsidies, we construct a product level database on CVD duties imposed during 1995-2001 by four major users of CVD -- Australia, Canada, the EU, and the US -- and use it to test the above prediction of the model for the case of China's accession to the WTO in 2001 and Taiwan's accession to the WTO in 2002. We use the underlying variation in the way countervailing duties are targeted across different industries to derive a proxy for the threat of retaliation faced by Chinese (Taiwanese) industries at the time of the country's accession to the WTO. We show that in case of both countries accession to the WTO led to a relative increase in tariffs for sectors facing a higher threat of retaliation by CVD. We also show that, as predicted by the model, the increase in tariffs was larger in sectors with higher costs imposed by retaliation.