DP4508 | The Economics of Special and Differential Trade Regimes

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We examine the theoretical rationale for the simultaneous granting of temporary Special and Differential (S&D) treatment to developing countries - both in ite protection and market-access components - under the WTO agreements. S&D rules constitute the centrepiece of the WTO?s strategy for integrating developing countries into the trading system, but have been criticized?both on theoretical and empirical grounds?as being ineffective. We show that seemingly non-reciprocal, limited-duration S&D treatment can be rationalized as a transitional equilibrium feature of a self-enforcing international agreement between a large developed and a small developing country, where the two sides have a joint interest in helping the developing country to overcome a policy commitment problem.