ABSTRACT: Economic theory suggests that countries’ tariff commitments in trade agreements reflect their import market power at the time of negotiations. However, as countries grow, their market power in different sectors can change in unforeseen ways and their commitments may no longer reflect changed economic conditions.
Other studies have confirmed the role of terms-of-trade for tariff setting. Broda, Limão, and Weinstein (2008) show that importers that have market power use it in setting noncooperative trade policy, like in the case of tariffs prior to WTO or in areas not covered by cooperation.
In the past 25 years, with the exception of sectoral initiatives such as the ITA, no major tariff negotiations have taken place at the WTO despite remarkable economic growth enjoyed by many countries and resulting changes in import market power.
A large enough importing country may apply tariffs to drive down the world price net of tariffs, as the burden of trade taxes is shared between the consumers in the importing country and the producers in exporting countries.