Sustaining Free Trade with Imperfect Private Information about Non-Tariff Barriers

This paper examines the issue of sustaining free trade when countries receive imperfect private information about each other’s non-tariff barriers. Because the countries can misrepresent their private belief about other countries’ protection levels, the punishment scheme to deter deviations from free trade should provide right incentives for the countries to elicit the true private information. This incentive constraint (ICP) restricts the length of punishment phases. If the private information is almost perfect, the ICP is not a binding constraint for symmetric countries in sustaining symmetric cooperation. However, the ICP does become a binding constraint if there exists a large enough asymmetry in the countries’ incentives to deviate from free trade, or if there exists a large enough asymmetry in the transparency of countries’ trade policies. Then, a mechanism that publicizes the information about non-tariff barriers, like Trade Policy Review Mechanism (TPRM) of WTO, can play a positive role in restoring cooperation by relaxing the ICP.