How does import market power matter for trade agreements?

• Negotiated tariff binding rates are negatively associated with import market power. • There is more tariff flexibility in products with lower import market power. • We calibrate the political weights of each industry for all WTO members. • Freeriding in negotiations doesn’t appear to have affected negotiated tariffs significantly. We evaluate two potential causes of deviation from efficiency in WTO negotiations: (i) a free-riding problem that may be caused by the WTO's nondiscrimination requirement, and (ii) asymmetric information about government preferences. Theories based on the above two causes generate starkly different predictions about the pattern of negotiated tariffs. We find that the WTO agreement provides more tariff flexibility in products with lower import market power. This finding is consistent with the implication of a negotiation model under asymmetric information, which predicts a tradeoff between flexibility and discipline in tariff obligations. Finally, we use the model together with data on negotiated and applied tariffs to calibrate the political weight of each import-competing industry for all WTO member countries.