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 costs of all firms induce some exit, reallocating market shares towards the most efficient firms. The paper analyses when this mechanism generates protectionism. With political economy motives, trade liberalization increases the use of NTMs in the non-cooperative equilibrium and a trade agreement may be welfare reducing if governments care about the most efficient firms only. Moreover, a Pareto improving agreement may require an income redistribution between countries if firm average productivity differs across countries.