International Coordination of Trade and Domestic Policies

The success of GATT negotiations in lowering tariff barriers worldwide has shifted attention to the use of domestic policies as a secondary trade barrier, raising the question of how to deal with domestic policies within an international trade agreement. Currently, no theoretical basis exists for considering the allocation of scarce enforcement power at the international level over trade and domestic policies within a unified agreement. This paper provides such a framework in a model of self-enforcing international agreements. It is shown that, when limited enforcement power prevents countries from implementing a fully efficient set of trade and domestic policies, tariff barriers are the most efficient means of affording countries protection so as to maintain the viability of the agreement. This result supports current GATT language which allows governments the use of tariffs but prohibits the use of domestic policies as "disguised" trade restrictions