Protection without Discrimination

This paper shows that Non-Tariff Measures (NTMs) may fully respect the non-discrimination principle of the WTO and still act as a protectionist device. NTMs that raise the costs of all firms induce some exit and thus reallocate market shares towards the most efficient firms. The paper analyzes when this mechanism generates protectionism. Introducing political economy motives in the model, this paper shows that trade liberalization increases the use of NTMs in the non-cooperative equilibrium. Moreover, a trade agreement may be welfare reducing if governments only care about the most efficient firms. A Pareto improving trade agreement may require an international income redistribution between countries if the firm productivity distribution differs across countries. These results may help explaining why recent trade negotiations face increasing opposition.