GATT: A Cooperative Equilibrium in a Noncooperative Trading Regime?

Abstract

As global tariff rates have fallen the use of nontariff barriers to trade have become more prevalent. One incentive for a country to depart from free trade is to levy the optimal tariff in order to maximize domestic welfare. The GATT was designed to maintain free trade through a system of managed retaliation. As is well known, in a game-theoretic trade model of tariffs with no uncertainty, free trade is an equilibrium outcome. However, with the introduction of uncertainty and asymmetric information it is shown that the equilibrium outcome(s) has each country imposing nontariff barriers to trade.