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Tariff Retaliation versus Financial Compensation in the Enforcement of International Trade Agreements

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Limão, Nuno
Saggi, Kamal

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Abstract

We analyze whether financial compensation is preferable to the current system of dispute settlement in the World Trade Organization that permits member countries to impose retaliatory tariffs in response to trade violations committed by other members. We show that monetary fines are more efficient than tariffs in terms of granting compensation to injured parties when there are violations in equilibrium. However, fines suffer from an enforcement problem since they must be paid by the violating country. If fines must ultimately be supported by the threat of retaliatory tariffs, they fail to yield a more cooperative outcome than the current system. We also consider the use of bonds as a means of settling disputes. If bonds can be posted with a third party, they do not have to be supported by retaliatory tariffs and can improve the negotiating position of countries that are too small to threaten tariff retaliation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5560.

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Date of creation: Mar 2006
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Handle: RePEc:cpr:ceprdp:5560

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Related research
Keywords: bonds concessions dispute settlement monetary fines reciprocity tariffs WTO

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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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  2. Petros C. Mavroidis & Kyle Bagwell & Robert W. Staiger, 2004. "The case for tradable remedies in WTO dispute settlement," Discussion Papers 0405-05, Columbia University, Department of Economics. [Downloadable!]
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  3. Bagwell, K. & Staiger, R.W., 1988. "A Theory Of Managed Trade," Papers e-88-39, Stanford - Hoover Institution.
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  4. Kyle Bagwell & Petros C. Mavroidis & Robert W. Staiger, 2003. "The Case for Auctioning Countermeasures in the WTO," NBER Working Papers 9920, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Limao, Nuno, 2005. "Trade policy, cross-border externalities and lobbies: do linked agreements enforce more cooperative outcomes?," Journal of International Economics, Elsevier, vol. 67(1), pages 175-199, September. [Downloadable!] (restricted)
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  6. Chad P. Bown, 2004. "On the Economic Success of GATT/WTO Dispute Settlement," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 811-823, 05. [Downloadable!] (restricted)
  7. Hoekman, Bernard & Saggi, Kamal, 2007. "Tariff bindings and bilateral cooperation on export cartels," Journal of Development Economics, Elsevier, vol. 83(1), pages 141-156, May. [Downloadable!] (restricted)
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