How States Ration Flexibility: Tariffs, Remedies, and Exchange Rates as Policy Substitutes

Abstract

A close look at the commitments of World Trade Organization (WTO) members presents a striking paradox. Most states could raise their duties significantly before falling afoul of their WTO obligations. Moreover, such “binding overhang” varies between countries: some could more than double the amount of trade protection they offer overnight, whereas others are tightly constrained. What accounts for this variation? The author argues that more flexibility is not always better: obtaining it and subsequently using it are both costly. Rather than maximize flexibility, states thus seek an optimal amount. If they have access to policy space through other means, such as currency devaluations and trade remedies, they will exercise restraint in seeking binding overhang. The same supply-side logic holds at the domestic level: governments strategically withhold binding overhang from industries that are able to rely on trade remedies, despite the fact that these tend to have the greatest political clout.