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Optimal remedies in international trade agreements

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  • Beshkar, Mostafa

Abstract

This paper takes a mechanism-design approach to characterize a politically optimal trade agreement under the assumption that governments have private information about the fluctuating political pressure they face from domestic interest groups to restrict trade. The optimal mechanism under these changing circumstances involves a remedy system for breach of trade agreements that specifies less-than-proportional retaliations against deviating parties. This result is in contrast to the conventional wisdom in the literature regarding the efficiency of the Reciprocity Principle as a rule of renegotiation in trade agreements. I also consider an institutional structure in which only commensurate retaliations are practical but governments can employ a public randomizing device to authorize retaliations. I show that it is optimal to authorize retaliations only randomly. This suggests a role for the WTO dispute settlement process as a public randomizing device.

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  • Beshkar, Mostafa, 2010. "Optimal remedies in international trade agreements," European Economic Review, Elsevier, vol. 54(3), pages 455-466, April.
    • Handle: RePEc:eee:eecrev:v:54:y:2010:i:3:p:455-466
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    References listed on IDEAS

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    1. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
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    5. Kyle Bagwell & Robert W. Staiger, 2005. "Enforcement, Private Political Pressure, and the General Agreement on Tariffs and Trade/World Trade Organization Escape Clause," The Journal of Legal Studies, University of Chicago Press, vol. 34(2), pages 471-513, June.
    6. Rosendorff, B. Peter, 2005. "Stability and Rigidity: Politics and Design of the WTO's Dispute Settlement Procedure," American Political Science Review, Cambridge University Press, vol. 99(3), pages 389-400, August.
    7. Schwartz, Warren F & Sykes, Alan O, 2002. "The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization," The Journal of Legal Studies, University of Chicago Press, vol. 31(1), pages 179-204, January.
    8. Robert Z. Lawrence, 2003. "Crimes and Punishments?: Retaliation under the WTO," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 372, April.
    9. 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.
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    Cited by:

    1. Kuenzel, David J., 2017. "WTO dispute determinants," European Economic Review, Elsevier, vol. 91(C), pages 157-179.
    2. Richard Chisik & Harun Onder, 2017. "Does Limited Punishment Limit The Scope For Cross Retaliation?," Economic Inquiry, Western Economic Association International, vol. 55(3), pages 1213-1230, July.
    3. Nuno Limão & Kamal Saggi, 2018. "Size inequality, coordination externalities and international trade agreements," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 16, pages 357-374, World Scientific Publishing Co. Pte. Ltd..
    4. Lee, Gea M., 2016. "Optimal international agreement and restriction on domestic efficiency," Journal of International Economics, Elsevier, vol. 99(C), pages 138-155.
    5. Chad Bown & Kara Reynolds, 2015. "Trade flows and trade disputes," The Review of International Organizations, Springer, vol. 10(2), pages 145-177, June.
    6. Mostafa Beshkar & Jee-Hyeong Park, 2017. "Dispute Settlement with Second-Order Uncertainty: The Case of International Trade Disputes," CAEPR Working Papers 2017-010, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    7. Giovanni Maggi & Robert W. Staiger, 2009. "Breach, Remedies and Dispute Settlement in Trade Agreements," Cowles Foundation Discussion Papers 1735, Cowles Foundation for Research in Economics, Yale University.
    8. Hartigan James C., 2015. "Did the Agreement on Safeguards Nullify their Use?," Global Economy Journal, De Gruyter, vol. 15(1), pages 155-172, March.
    9. Richard Chisik & Chuyi Fang, 2020. "Cross-retaliation and International Dispute Settlement," Working Papers 066, Ryerson University, Department of Economics.
    10. Petros C. Mavroidis, 2016. "Dispute Settlement in the WTO. Mind over Matter," RSCAS Working Papers 2016/04, European University Institute.
    11. Gea Myoung Lee, 2011. "Optimal International Agreement and Treatment of Domestic Subsidy," Working Papers 01-2011, Singapore Management University, School of Economics.
    12. Petros C. Mavroidis, 2015. "Dispute Settlement in the WTO (Mind over Matter)," RSCAS Working Papers 2015/34, European University Institute.
    13. Beshkar, Mostafa & Bond, Eric W. & Rho, Youngwoo, 2015. "Tariff binding and overhang: Theory and evidence," Journal of International Economics, Elsevier, vol. 97(1), pages 1-13.
    14. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 317-390, Elsevier.
    15. Kara M. Reynolds & Chad P. Bown, 2014. "Trade Flows and Trade Disputes," Working Papers 2014-05, American University, Department of Economics.
    16. Bowen, Renee, 2011. "Forbearance in Optimal Multilateral Trade Agreements," Research Papers 2085, Stanford University, Graduate School of Business.
    17. Mostafa Beshkar, 2016. "Arbitration and Renegotiation in Trade Agreements," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 32(3), pages 586-619.
    18. Beshkar, Mostafa, 2009. "Trade skirmishes and safeguards: A theory of the WTO Dispute Settlement Process," WTO Staff Working Papers ERSD-2009-09, World Trade Organization (WTO), Economic Research and Statistics Division.
    19. Hartigan, James C., 2018. "Punching out of one's weight class? Cross agreement retaliation in the WTO," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 274-288.
    20. Mostafa Beshkar, 2014. "Arbitration and Renegotiation in Trade Agreements," Caepr Working Papers 2014-004, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    21. repec:rye:wpaper:wp078 is not listed on IDEAS
    22. Frank Stähler, 2023. "An optimal investor-state dispute settlement mechanism," Journal of Economics, Springer, vol. 138(1), pages 1-16, January.
    23. James C. Hartigan, 2016. "In or Out? Standards, Discretion, Compliance and the WTO," The World Economy, Wiley Blackwell, vol. 39(6), pages 738-754, June.
    24. 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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