is intuitive in that it may help to explain the relatively high applied tariffs remaining under the WTO in sectors such as agriculture, textiles, and footwear that continue to persist because the exporting interests behind these products are diffuse. A limitation of the historical framework for conducting negotiations may have arisen because negotiations were voluntary and the tariff liberalization outcome would be extended to all members under the MFN rule of nondiscrimination. However, because the existence of MFN implied that countries could free ride in the negotiations, sometimes a critical mass of exporting interests may not have bothered to show up at the negotiating table in the first place. Second, an important insight arising from this research is the recognition that not all terms-of-trade effects may be fully neutralized even upon a country’s entry into the WTO, a point to which I return below. I.e., Ludema-Mayda’s results identify one potential area in which there may be more tariff-liberalizing work (for terms-of-trade neutralizing reasons) to be “done”; nevertheless in discovering it, they also identify how the historical GATT/WTO approach of relying on voluntary negotiations and MFN may have contributed to the process by which tariff liberalization (for terms-of-trade neutralizing reasons) remains currently incomplete.<sup>9</sup> Finally, given the evidence that the terms-of-trade effects matter for trade policy determination, and that the GATT/WTO system may be working to at least partially neutralize such externalities through negotiations, how economically important is the job that the WTO has done for the major economies of the system? One way to address this issue is to ask how large Nash tariffs - i.e., the combination of best-response tariffs that countries would use - would be in a trade war, and what the economic costs of eliminating current levels of trade policy cooperation would be. Using a quantitative approach, Ossa (2014) constructs counterfactual estimates for the size of Nash tariffs in a model featuring seven regions (including the US, EU, Japan, China, India, Brazil, and rest of the world) and finds the median to be 58.1 percent across countries and industries.<sup>10</sup> The quantitative model suggests substantial gains from the imposition of the tariffs that are currently in place, relative to the levels of welfare that would arise were countries to resort to imposing their Nash under a trade war.

# **2.3 Additional evidence on applied tariffs, bindings, and tariff overhang for countries inside the WTO**

The next framework that I explore is the recent theoretical and empirical contribution of Nicita, Olarreaga and Silva (2013), which examines the relationship between a WTO member’s applied tariffs and the role of import market power, contingent on whether those tariffs are constrained

> 9Bown and Crowley (2013a) provide additional evidence that terms-of-trade motives continue to affect trade policy decisions for WTO members, albeit in a different trade policy setting. They provide evidence consistent with the Bagwell and Staiger (1990) repeated game model of trade agreements by focusing on the US use of antidumping and safeguards over 1997-2006. They find for a country like the US (with applied tariffs virtually at their binding level), the flexibility of antidumping and safeguards can be seen as allowing the government to raise import protection levels in response to trade volume shocks arising for terms-of-trade motivations.

> 10This is notably higher than the estimates of the tariffs applied at the height of the Great Depression in the 1930s, after the US imposition of the Smoot-Hawley tariff in 1930 and international retaliatory response. See Bown and Irwin (2015) for a discussion of the range of tariffs more likely to have been in effect just prior to the GATT’s starting point in 1947, which they put at around 22 percent.

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