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This paper proposes a theory that predicts low levels of protection during periods of "normal" trade volume coupled with episodes of "special" protection when trade volumes surge. This dynamic pattern of protection emerges from a model in which countries choose levels of protection in a repeated game setting facing volatile trade swings. High trade volume leads to a greater incentive to unilaterally defect from cooperative tariff levels. Therefore as the volume of trade expands, the level of protection must rise in a cooperative equilibrium to mitigate the rising trade volume and hold the incentive to defect in check.

To what extent must nations cede control over their economic and social policies if global efficiency is to be achieved in an interdependent world? This question is at the center of the debate over the appropriate scope of international economic institutions such as the GATT (and now its successor, the WTO), where member-countries are considering proposals that would broaden GATT's orientation beyond conventional trade policy measures to include negotiations over labor and environmental standards. Such proposals appear to encroach on traditional limits of national sovereignty, and they raise fundamental questions about the structure of international economic relations among sovereign states. An important question therefore concerns the minimal range of policies over which international negotiations must proceed if global efficiency is to be achieved. As currently structured, GATT's central focus is on the removal of trade barriers to market access, and its approach to labor and environmental standards is best characterized as somewhere between "neglect" and "benign neglect." 1 There are really two dimensions of GATT's approach to these issues, and they correspond to (i) the freedom each country has to determine its own domestic standards (i.e., the range of domestic standards that are GATT-legal), and (ii) the freedom each country has to respond with trade measures to the (GATT-legal) standards chosen by its trading partners. To understand the implications of GATT rules along these two dimensions, it is helpful to distinguish further between domestic standards that relate to production (e.g., a country's child labor laws or its regulations regarding the disposal of industrial waste) and domestic standards that relate to consumption (e.g., a country's recycling laws or its regulations controlling the sale and distribution of the products of prison labor). In general, countries have broad freedom under GATT's rules to determine their own standards, though this freedom is somewhat greater with regard to production standards than it is with regard to consumption standards. On the other hand, as far as responding to the (GATT-legal) standards choices of their trading partners, countries face fairly significant limitations under GATT rules. 2 Hence, in the high-profile 1991 GATT tuna-dolphin dispute between the United States and Mexico, it was not the right of the United States to set its own environmental (production) standards with respect to the protection and conservation of dolphins that was challenged. What was challenged as GATT-illegal was the decision by the United States to impose a trade embargo against Mexican tuna imports in response to the environmental standards of Mexico. Note also that erecting trade restrictions per se in response to the labor or environmental standards of a trading partner is not GATT-illegal: if the tariff in question is not bound in a GATT schedule, then a country is of course free to raise the tariff for this (or any other) reason. And even where the tariff in question is covered ...