The Role of GATT/WTO as a Commitment Device in the Presence of a Time Lag: Free Trade,Time‐consistent Tariff Policy and Market Size

We consider whether a free trade policy is superior to tariff policies in the presence of a time lag between production and trade decisions. We show that the preferable choice between a free trade policy and a time‐consistent tariff policy depends on the market size of the importing country. However, because a free trade policy itself is not necessarily credible in the presence of a time lag, the importing country requires an international organisation such as GATT/WTO as a commitment device. Accordingly, employing a non‐cooperative game approach, we analyse under what conditions becoming a member of such an international organisation is a subgame perfect Nash equilibrium and show that free trade under the GATT/WTO regime is Pareto improving for the importing and exporting countries.