Domestic political competition and binding overhang in developing countries

Governments, especially in developing countries, routinely practice binding overhang (i.e. setting applied tariffs below their binding WTO commitments) and frequently move the applied tariff for a given product up and down over the business cycle. Indeed, counter to conventional wisdom, applied tariffs are pro-cyclical in developing countries. We explain this phenomenon using a dynamic theory of lobbying. The government is captured by import-competing industries (or exporters), whose applied tariff concessions in response to lobbying threats by exporters (import-competing industries) cause fluctuations in applied tariffs and, thus, binding overhang. Applied tariffs are pro-cyclical when the government is captured by import-competing industries because these industries concede lower tariffs to exporters during recessions given recessions lower the opportunity cost of lobbying and thereby generate a stronger lobbying threat.