When Will WTO Membership Signal Commitment to Free Trade by A Developing Country
A signaling game involving three parties: a developing country, the WTO and a developed country is outlined. The developing country might be tempted to renege or deviate from free trade. Although the costs of reneging from free trade result in a loss of credibility, the costs come in the future and are discounted. Short-term gains include revenues from import taxes that are important to the public finances of low-income countries. Membership of a rules based organisation such as the WTO can act as a credible commitment device. In these circumstances, however, the South's commitment to free trade depends upon a clear signal from the North that it too is committed to free trade. Otherwise the South will continue to deviate from optimal and freer trade policies.