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Optimal remedies in international trade agreements

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  • Beshkar, Mostafa

Abstract

This paper takes a mechanism-design approach to characterize a politically optimal trade agreement under the assumption that governments have private information about the fluctuating political pressure they face from domestic interest groups to restrict trade. The optimal mechanism under these changing circumstances involves a remedy system for breach of trade agreements that specifies less-than-proportional retaliations against deviating parties. This result is in contrast to the conventional wisdom in the literature regarding the efficiency of the Reciprocity Principle as a rule of renegotiation in trade agreements. I also consider an institutional structure in which only commensurate retaliations are practical but governments can employ a public randomizing device to authorize retaliations. I show that it is optimal to authorize retaliations only randomly. This suggests a role for the WTO dispute settlement process as a public randomizing device.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 54 (2010)
Issue (Month): 3 (April)
Pages: 455-466

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Handle: RePEc:eee:eecrev:v:54:y:2010:i:3:p:455-466

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Related research

Keywords: Breach remedies Trade agreements Reciprocity principle World Trade Organization Safeguards Randomizing device;

References

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  1. Giovanni Maggi, 1999. "The Role of Multilateral Institutions in International Trade Cooperation," American Economic Review, American Economic Association, vol. 89(1), pages 190-214, March.
  2. Bagwell,K. & Staiger,R.W., 1998. "An economic theory of GATT," Working papers 15, Wisconsin Madison - Social Systems.
  3. Kyle Bagwell & Robert W. Staiger, 2005. "Enforcement, Private Political Pressure, and the General Agreement on Tariffs and Trade/World Trade Organization Escape Clause," The Journal of Legal Studies, University of Chicago Press, vol. 34(2), pages 471-513, 06.
  4. Feenstra, Robert C & Lewis, Tracy R, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1287-307, November.
  5. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  6. Rosendorff, B Peter, 1996. "Voluntary Export Restraints, Antidumping Procedure, and Domestic Politics," American Economic Review, American Economic Association, vol. 86(3), pages 544-61, June.
  7. Schwartz, Warren F & Sykes, Alan O, 2002. "The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization," The Journal of Legal Studies, University of Chicago Press, vol. 31(1), pages S179-204, January.
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Citations

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Cited by:
  1. Maggi, Giovanni & Staiger, Robert, 2009. "Breach, Remedies and Dispute Settlement in Trade Agreements," CEPR Discussion Papers 7527, C.E.P.R. Discussion Papers.
  2. Gea Myoung Lee, 2012. "Optimal International Agreement and Treatment of Domestic Subsidy," Working Papers 26-2012, Singapore Management University, School of Economics.
  3. Bowen, Renee, 2011. "Forbearance in Optimal Multilateral Trade Agreements," Research Papers 2085, Stanford University, Graduate School of Business.
  4. Nuno Limao & Kamal Saggi, 2011. "Size Inequality, Coordination Externalities and International Trade Agreements," NBER Working Papers 17603, National Bureau of Economic Research, Inc.
  5. Beshkar, Mostafa, 2010. "Trade skirmishes safeguards: A theory of the WTO dispute settlement process," Journal of International Economics, Elsevier, vol. 82(1), pages 35-48, September.

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