Work

Tariff overhang and aid: Theory and empirics

Year: 2023

Type: article

Abstract: In this paper, we consider aid payments as a possible explanation for tariff overhangs. We set up a theoretical model in which rich countries use development aid to pay for tariff concessions by poorer countries. The more aid they receive as compensation, the more poor countries reduce the applied tariff below the bound tariff rate. Anticipating this mechanism, countries can negotiate a bound tariff rate that induces the joint optimal applied tariff and aid as outcomes. We empirically examine the relationship between tariff overhangs and donor aid preferences using detailed data on WTO members’ bound and applied tariff rates under the Uruguay agreement. The data sample contains a predominant majority of WTO members that are aid recipients under the Uruguay agreement. Our results provide support for the model’s aid-for-trade mechanism.

Source: Journal of Development Economics

DOI: 10.1016/j.jdeveco.2023.103209

Authors: Oliver Lorz, Susanna Thede

Institutions: RWTH Aachen University, University of Malta, Örebro University

Language: English

Topic: Global trade and economics

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Peace, justice, and strong institutions, Partnerships for the goals

Open Access status: hybrid

Estimated APC paid: $3,880