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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.

Suggested Citation

  • 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.
    2. Robert C. Feenstra & Tracy R. Lewis, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1287-1307.
    3. Rosendorff, B Peter, 1996. "Voluntary Export Restraints, Antidumping Procedure, and Domestic Politics," American Economic Review, American Economic Association, vol. 86(3), pages 544-561, June.
    4. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
    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. 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.
    7. 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.
    8. 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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    Citations

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    Cited by:

    1. Chad Bown & Kara Reynolds, 2015. "Trade flows and trade disputes," The Review of International Organizations, Springer, vol. 10(2), pages 145-177, June.
    2. Mostafa Beshkar & Jee-Hyeong Park, 2017. "Dispute Settlement with Second-Order Uncertainty: The Case of International Trade Disputes," Caepr Working Papers 2017-010 Classification-K, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    3. Richard Chisik & Chuyi Fang, 2017. "Limited Cross-retaliation and Lengthy Delays in International Dispute Settlement," Working Papers 066, Ryerson University, Department of Economics.
    4. Petros C. Mavroidis, 2016. "Dispute Settlement in the WTO. Mind over Matter," RSCAS Working Papers 2016/04, European University Institute.
    5. Gea Myoung Lee, 2011. "Optimal International Agreement and Treatment of Domestic Subsidy," Working Papers 01-2011, Singapore Management University, School of Economics.
    6. Petros C. Mavroidis, 2015. "Dispute Settlement in the WTO (Mind over Matter)," RSCAS Working Papers 2015/34, European University Institute.
    7. 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.
    8. Giovanni Maggi & Robert W. Staiger, 2009. "Breach, Remedies and Dispute Settlement in Trade Agreements," NBER Working Papers 15460, National Bureau of Economic Research, Inc.
    9. 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.
    10. Limão, Nuno & Saggi, Kamal, 2013. "Size inequality, coordination externalities and international trade agreements," European Economic Review, Elsevier, vol. 63(C), pages 10-27.
    11. 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.
    12. Kuenzel, David J., 2017. "WTO dispute determinants," European Economic Review, Elsevier, vol. 91(C), pages 157-179.
    13. Lee, Gea M., 2016. "Optimal international agreement and restriction on domestic efficiency," Journal of International Economics, Elsevier, vol. 99(C), pages 138-155.
    14. Hartigan James C., 2015. "Did the Agreement on Safeguards Nullify their Use?," Global Economy Journal, De Gruyter, vol. 15(1), pages 155-172, March.
    15. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, Elsevier.
    16. Kara M. Reynolds & Chad P. Bown, 2014. "Trade Flows and Trade Disputes," Working Papers 2014-05, American University, Department of Economics.
    17. Bowen, Renee, 2011. "Forbearance in Optimal Multilateral Trade Agreements," Research Papers 2085, Stanford University, Graduate School of Business.
    18. repec:inu:caeprp:2014004 is not listed on IDEAS
    19. 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.
    20. 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.

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