Special and Differential Treatment of Developing Countries in the WTO

In this paper, we examine the theoretical rationale for WTO rules on the special and differential treatment (SDT) of developing countries. We describe a model of bilateral trade between a small country and a large trading partner, in which the small country suffers from a domestic commitment problem in trade policy. This problem arises because investors in the import-competing sector lobby the government to enact and maintain protectionist policies. We show that a reciprocal trade agreement, in which the large country lowers its tariffs conditionally on the small country doing the same, creates a carrot and stick' mechanisms that helps the small country to overcome its commitment problem. If capacity in the import-competing sector can only be reduced gradually, the agreement may need to allow the small country to delay the implementation of its trade liberalization commitments, in line with SDT provisions in the WTO. Our analysis suggests that, if reconciled with the principle of reciprocity, SDT can help developing countries to liberalize and improve their trading prospects.