Peeling Away the Layers: Impacts of Durable Tariff Elimination

Abstract

We demonstrate that durable MFN tariff elimination affects trade patterns through several layers, and magnitudes of effects are sizable. The WTO Information Technology Agreement’s (ITA) unique setting allows us to overcome the challenges associated with identifying effects of non-discriminatory trade policies due to two reasons: (i) ITA constitutes a quasi-natural experiment of several “passive” signatories joining the agreement as an unavoidable part of pursuing a larger policy objective, and (ii) ITA’s partial coverage of the IT sector provides a natural control group for identification based on cross-product variation. Our analysis finds novel nonlinear impacts of tariff liberalization: Complete tariff elimination results in large additional trade gains - over and above tariff reductions - especially for intermediate goods. The commitment to durable tariff elimination, through WTO bindings, adds a further two layers, boosting both imports and exports more than equivalent unilateral reforms. This commitment spurned development of a downstream IT export sector in “passive” signatories.

Keywords: non-discriminatory trade policies, MFN tariff elimination, World Trade Organization, Information Technology Agreement, trade policy certainty, global value chains

JEL Classification: F130, F140, F150, L630