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

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  • Limão, Nuno
  • Saggi, Kamal

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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Keywords: bonds; concessions; dispute settlement; monetary fines; reciprocity; tariffs; WTO;

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  13. Nuno Limão, 2002. "Trade policy, cross-border externalities and lobbies: do linked agreements enforce more cooperative outcomes?," International Trade 0206002, EconWPA, revised 28 Jul 2002.
  14. Ludema, R.D., 1990. "Optimal International Trade Agreements And Dispute Settlement Procedures," UWO Department of Economics Working Papers 9101, University of Western Ontario, Department of Economics.
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Citations

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Cited by:
  1. Hoekman, Bernard & Mavroidis, Petros C, 2013. "Bite the Bullet: Trade Retaliation, EU Jurisprudence and the Law and Economics of ‘Taking One for the Team’," CEPR Discussion Papers 9496, C.E.P.R. Discussion Papers.
  2. Kilolo, Jean-Marc Malambwe, 2013. "Country size, trade liberalization and transfers," MPRA Paper 47996, University Library of Munich, Germany.
  3. Limão, Nuno & Saggi, Kamal, 2013. "Size inequality, coordination externalities and international trade agreements," European Economic Review, Elsevier, vol. 63(C), pages 10-27.
  4. Hoekman, Bernard, 2011. "Proposals for WTO reform : a synthesis and assessment," Policy Research Working Paper Series 5525, The World Bank.
  5. Richard Chisik, 2010. "Limited Incremental Linking and Unlinked Trade Agreements," Working Papers 023, Ryerson University, Department of Economics.
  6. Barbara Dluhosch & Daniel Horgos, 2012. "(When) Does Tit-for-Tat Diplomacy in Trade Policy Pay Off?," FIW Working Paper series 085, FIW.
  7. 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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