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Trade disputes, quality choice, and economic integration

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  • Chisik, Richard

Abstract

Recent work demonstrates the importance of developing high quality output in order to compete in export markets and other recent studies verify the prevalence of fixed and ongoing trade costs while participating in those markets. I consider the joint choice of quality and export promotion costs when trade relationships are subject to temporary disputes. When transparency is low and macroeconomic instability is high, disputes arrive more frequently and, therefore, firms may inefficiently choose lower levels of quality and export promotion. These, in turn, build shallower trading relationships with less trade volumes and higher tariffs, and generate greater trade reductions during the more common trade disputes. Several institutional features of the WTO dispute settlement mechanism that are generally lacking in preferential trade agreements such as improved transparency, dispute investigation, and the provision to recommend asymmetric continuation payoffs can ameliorate these inefficient quality choice outcomes. Hence, lower quality output and lower quality trading relationships may be more endemic to countries that depend on preferential trading areas as opposed to the WTO.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 88 (2012)
Issue (Month): 1 ()
Pages: 47-61

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Handle: RePEc:eee:inecon:v:88:y:2012:i:1:p:47-61

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Quality choice; Irreversibilities; Economic integration dispute settlement; Dynamic games; WTO; Preferential trade agreements;

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Cited by:
  1. Sergei Guriev & Mikhail Klimenko, 2007. "Duration and Term Structure of Trade Agreements," Working Papers WP13_2007_09, Laboratory for Macroeconomic Analysis.
  2. Richard Chisik, 2010. "Limited Incremental Linking and Unlinked Trade Agreements," Working Papers 023, Ryerson University, Department of Economics.

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