Domestic Policies, Hidden Protection and the GATT/WTO

As tariff barriers have fallen worldwide, regulation of domestic policy has become increasingly important in international trade agreements. This has led to the emergence of a theoretical literature addressing the integration of perfectly observable domestic policy into trade agreements. However, the assumption that domestic policy is perfectly observable is problematic since the interpretation and enforcement of domestic policy statutes is often non-transparent. Thus, it may be difficult to determine whether lack of market access is due simply to random shocks or to the use of domestic policies as hidden trade barriers. In this paper, we model international coordination over trade and domestic policy when domestic policy is private information and thus can be used as a form of "hidden protection." We show that the optimal design of an efficient agreement depends greatly on whether domestic policy is observable or unobservable