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On the role of retaliation in trade agreements

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Author Info
MARTIN, Alberto
VERGOTE, Wouter (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

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Abstract

This paper analyzes the role of retaliation in trade agreements. It shows that, in the presence of private information, retaliation can always be used to increase the welfare derived from such agreements by the participating governments. In particular, it is shown that retaliation is a necessary feature of any efficient equilibrium. We argue that retaliation would not be necessary if governments could resort to international transfers or export subsidies to compensate for terms-of-trade externalities. Within the current world trading system, though, in which transfers are seldom observed whereas export subsidies are prohibited, the use of the remaining trade instruments in a retaliatory fashion might be optimal. The model is used to interpret the retaliatoy use of antidumping observed in the last decades, and the proliferation of these measures relative to other trade remedies.

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Publisher Info
Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2007089.

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Date of creation: 01 Nov 2007
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Handle: RePEc:cor:louvco:2007089

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Related research
Keywords: cooperation; retaliation; private information; tariffs; trade agreements;

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

References listed on IDEAS
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  1. Thomas Klitgaard & Karen Schiele, 1998. "Free versus fair trade: the dumping issue," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Aug. [Downloadable!]
  2. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-65, Autumn.
    Other versions:
  3. Susan Athey & Kyle Bagwell & Chris Sanchirico, 1998. "Collusion and Price Rigidity," Working papers 98-23, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  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. [Downloadable!] (restricted)
    Other versions:
  5. repec:att:wimass:1920423 is not listed on IDEAS
  6. Hansen, Wendy L & Prusa, Thomas J, 1997. "The Economics and Politics of Trade Policy: An Empirical Analysis of ITC Decision Making," Review of International Economics, Blackwell Publishing, vol. 5(2), pages 230-45, May.
  7. Blonigen, Bruce A. & Bown, Chad P., 2003. "Antidumping and retaliation threats," Journal of International Economics, Elsevier, vol. 60(2), pages 249-273, August. [Downloadable!] (restricted)
  8. Thomas J. Prusa, 2001. "On the spread and impact of anti-dumping," Canadian Journal of Economics, Canadian Economics Association, vol. 34(3), pages 591-611, August. [Downloadable!] (restricted)
  9. David A. Miller, 2005. "The dynamic cost of ex post incentive compatibility in repeated games of private information," Game Theory and Information 0510002, EconWPA. [Downloadable!]
  10. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 394, David K. Levine. [Downloadable!]
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  11. Kyle Bagwell & Robert W. Staiger, 1997. "Reciprocity, Non-discrimination and Preferential Agreements in the Multilateral Trading System," NBER Working Papers 5932, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Bagwell, Kyle & Staiger, Robert W, 1990. "A Theory of Managed Trade," American Economic Review, American Economic Association, vol. 80(4), pages 779-95, September. [Downloadable!] (restricted)
    Other versions:
  13. Choi, E Kwan & Harrigan, James, 2004. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  14. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January. [Downloadable!] (restricted)
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  15. Kyle Bagwell & Robert W. Staiger, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March. [Downloadable!] (restricted)
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  16. Aoyagi, Masaki, 2003. "Bid rotation and collusion in repeated auctions," Journal of Economic Theory, Elsevier, vol. 112(1), pages 79-105, September. [Downloadable!] (restricted)
  17. Robert M. Feinberg & Kara M. Olson, 2004. "The Spread of Antidumping Regimes and the Role of Retaliation in Filings," International Trade 0411003, EconWPA. [Downloadable!]
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  18. Masaki Aoyagi, 2005. "Collusion through mediated communication in repeated games with imperfect private monitoring," Economic Theory, Springer, vol. 25(2), pages 455-475, 02. [Downloadable!] (restricted)
  19. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290. [Downloadable!] (restricted)
  20. Skrzypacz, Andrzej & Hopenhayn, Hugo, 2004. "Tacit collusion in repeated auctions," Journal of Economic Theory, Elsevier, vol. 114(1), pages 153-169, January. [Downloadable!] (restricted)
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  21. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kyle Bagwell, 2009. "Self-Enforcing Trade Agreements and Private Information," NBER Working Papers 14812, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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