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Tariff retaliation versus financial compensation in the enforcement of international trade agreements

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  • Limao, Nuno
  • Saggi, Kamal

Abstract

The authors 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. They 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. The authors 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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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3873.

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Date of creation: 01 Apr 2006
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Handle: RePEc:wbk:wbrwps:3873

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Keywords: Free Trade; International Trade and Trade Rules; Contract Law; Tax Law; Economic Theory&Research;

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References

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  1. Bagwell, Kyle & Staiger, Robert W, 1990. "A Theory of Managed Trade," American Economic Review, American Economic Association, vol. 80(4), pages 779-95, September.
  2. Park, Jee-Hyeong, 2000. "International trade agreements between countries of asymmetric size," Journal of International Economics, Elsevier, vol. 50(2), pages 473-495, April.
  3. Farrell, Joseph & Maskin, Eric, 1989. "Renegotiation in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 327-360, December.
  4. 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.
  5. Bagwell, Kyle & Mavroidis, Petros C. & Staiger, Robert W., 2004. "The case for tradable remedies in WTO dispute settlement," Policy Research Working Paper Series 3314, The World Bank.
  6. Wilfred Ethier, 2004. "Intellectual Property Rights And Dispute Settlement In The World Trade Organization," Journal of International Economic Law, Oxford University Press, vol. 7(2), pages 449-457, June.
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  8. Bagwell,K. & Mavroidis,P.C. & Staiger,R.W., 2003. "The case for auctioning countermeasures in the WTO," Working papers, Wisconsin Madison - Social Systems 14, Wisconsin Madison - Social Systems.
  9. Kyle Bagwell & Robert W. Staiger, 2006. "What Do Trade Negotiators Negotiate About? Empirical Evidence from the World Trade Organization," NBER Working Papers 12727, National Bureau of Economic Research, Inc.
  10. Ludema, Rodney D., 2001. "Optimal international trade agreements and dispute settlement procedures," European Journal of Political Economy, Elsevier, vol. 17(2), pages 355-376, June.
  11. 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.
  12. Kyle Bagwell & Robert W. Staiger, 1997. "An Economic Theory of GATT," NBER Working Papers 6049, National Bureau of Economic Research, Inc.
  13. van Damme, Eric, 1989. "Renegotiation-proof equilibria in repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 47(1), pages 206-217, February.
  14. Klimenko, Mikhail & Ramey, Garey & Watson, Joel, 2008. "Recurrent trade agreements and the value of external enforcement," Journal of International Economics, Elsevier, vol. 74(2), pages 475-499, March.
  15. Robert Z. Lawrence, 2003. "Crimes and Punishments?: Retaliation under the WTO," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 372, July.
  16. Chad P. Bown, 2004. "Developing Countries as Plaintiffs and Defendants in GATT/WTO Trade Disputes," The World Economy, Wiley Blackwell, vol. 27(1), pages 59-80, 01.
  17. Damme, E.E.C. van, 1989. "Renegotiation-proof equilibria in repeated prisoners' dilemma," Open Access publications from Tilburg University urn:nbn:nl:ui:12-154423, Tilburg University.
  18. 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, August.
  19. 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.
  20. Nuno Lim�o, 2007. "Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 821-855.
  21. Bagwell, Kyle & Mavroidis, Petros C. & Staiger, Robert W., 2007. "Auctioning countermeasures in the WTO," Journal of International Economics, Elsevier, vol. 73(2), pages 309-332, November.
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Cited by:
  1. Bernard M. Hoekman & Petros C. Mavroidis, 2013. "Bite the Bullet: Trade Retaliation, EU Jurisprudence and the Law and Economics of 'Taking One for the Team'," RSCAS Working Papers 2013/32, European University Institute.
  2. Kamal Saggi & Nuno Limao, 2011. "Size Inequality, Coordination Externalities and International Trade Agreements," Vanderbilt University Department of Economics Working Papers 1115, Vanderbilt University Department of Economics.
  3. Richard Chisik, 2010. "Limited Incremental Linking and Unlinked Trade Agreements," Working Papers 023, Ryerson University, Department of Economics.
  4. Barbara Dluhosch & Daniel Horgos, 2012. "(When) Does Tit-for-Tat Diplomacy in Trade Policy Pay Off?," FIW Working Paper series 085, FIW.
  5. Kilolo, Jean-Marc Malambwe, 2013. "Country size, trade liberalization and transfers," MPRA Paper 47996, University Library of Munich, Germany.
  6. 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.
  7. Hoekman, Bernard, 2011. "Proposals for WTO reform : a synthesis and assessment," Policy Research Working Paper Series 5525, The World Bank.

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