Domestic political competition and pro‐cyclical import protection

Governments, especially in developing countries, routinely practice binding overhang (i.e. setting applied tariffs below binding WTO commitments) and frequently move applied tariffs for given products up and down over the business cycle. Moreover, applied tariffs are pro‐cyclical in developing countries. We explain this phenomenon using a dynamic theory of lobbying between domestic interest groups. Applied tariffs are pro‐cyclical when high‐tariff interests (e.g. import‐competing industries) capture the government: these groups concede lower tariffs to low‐tariff interest groups (e.g. exporting firms or firms using imported intermediate inputs) during recessions because recessions lower the opportunity cost of lobbying and thereby generate a stronger lobbying threat.