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Recurrent trade agreements and the value of external enforcement

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  • Klimenko, Mikhail
  • Ramey, Garey
  • Watson, Joel

Abstract

This paper presents a theory of dynamic trade agreements in which external institutions, such as the WTO, play a central role in supporting credible enforcement. In our model, countries engage in ongoing negotiations, and, as a consequence, cooperative agreements become unsustainable in the absence of external enforcement institutions. By using mechanisms such as delays in dispute resolution and direct penalties, enforcement institutions can restore incentives for cooperation, despite the lack of coercive power. The occurrence of costly trade disputes, and the feasibility of mechanisms such as escape clauses, depend on the degree to which enforcement institutions can verify, and condition on, events that may lead to trade disputes.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:inecon:v:74:y:2008:i:2:p:475-499
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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. repec:bla:reviec:v:25:y:2017:i:1:p:21-43 is not listed on IDEAS
    3. repec:eee:inecon:v:108:y:2017:i:c:p:226-242 is not listed on IDEAS
    4. Goldlücke, Susanne & Kranz, Sebastian, 2012. "Infinitely repeated games with public monitoring and monetary transfers," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1191-1221.
    5. Sergei Guriev & Mikhail Klimenko, 2015. "Duration and Term Structure of Trade Agreements," Economic Journal, Royal Economic Society, vol. 125(589), pages 1818-1849, December.
    6. Tadashi Ito, 2007. "NAFTA and productivity convergence between Mexico and the US," IHEID Working Papers 26-2007, Economics Section, The Graduate Institute of International Studies, revised 27 Nov 2007.
    7. Vincent Anesi & Giovanni Facchini, "undated". "Coercive Trade Policy," Development Working Papers 376, Centro Studi Luca d'Agliano, University of Milano.
    8. Bag, Parimal Kanti & Roy Chowdhury, Prabal, 2016. "Gradualism in aid and reforms," Journal of International Economics, Elsevier, vol. 103(C), pages 108-123.
    9. Richard Chisik, 2010. "Limited Incremental Linking and Unlinked Trade Agreements," Working Papers 023, Ryerson University, Department of Economics.
    10. David A. Miller & Joel Watson, 2013. "A Theory of Disagreement in Repeated Games With Bargaining," Econometrica, Econometric Society, vol. 81(6), pages 2303-2350, November.
    11. 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.
    12. repec:eee:reveco:v:54:y:2018:i:c:p:274-288 is not listed on IDEAS
    13. Sebastian Kranz, 2012. "Discounted Stochastic Games with Voluntary Transfers," Cowles Foundation Discussion Papers 1847, Cowles Foundation for Research in Economics, Yale University.
    14. 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.
    15. Limão, Nuno & Saggi, Kamal, 2008. "Tariff retaliation versus financial compensation in the enforcement of international trade agreements," Journal of International Economics, Elsevier, vol. 76(1), pages 48-60, September.
    16. Sebastian Kranz, 2013. "Relational Contracting, Repeated Negotiations, and Hold-Up," Levine's Working Paper Archive 786969000000000676, David K. Levine.
    17. Meredith A. Crowley, 2006. "Why are safeguards needed in a trade agreement?," Working Paper Series WP-06-06, Federal Reserve Bank of Chicago.
    18. Joel Watson, 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," Games, MDPI, Open Access Journal, vol. 4(3), pages 1-40, August.
    19. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, Elsevier.
    20. Giovanni Maggi & Robert W. Staiger, 2008. "On the Role and Design of Dispute Settlement Procedures in International Trade Agreements," NBER Working Papers 14067, National Bureau of Economic Research, Inc.
    21. Keck, Alexander & Schropp, Simon, 2007. "Indisputably essential: The economics of dispute settlement institutions in trade agreements," WTO Staff Working Papers ERSD-2007-02, World Trade Organization (WTO), Economic Research and Statistics Division.
    22. Chisik, Richard, 2012. "Trade disputes, quality choice, and economic integration," Journal of International Economics, Elsevier, vol. 88(1), pages 47-61.

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