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

In: Economic Analysis of the Rules and Regulations of the World Trade Organization

Author

Listed:
  • Nuno Limão
  • Kamal Saggi

Abstract

We analyze whether financial compensation is preferable to the WTO’s current dispute settlement system that permits injured member countries to impose retaliatory tariffs. We show that, ex-post, monetary fines are more efficient than tariffs in terms of granting compensation to injured parties but 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 tariffs, they fail to yield a more cooperative outcome than the use of tariffs alone. Furthermore, the exchange of bonds between symmetric countries also does not improve enforcement relative to retaliatory tariffs.

Suggested Citation

  • Nuno Limão & Kamal Saggi, 2018. "Tariff retaliation versus financial compensation in the enforcement of international trade agreements," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 13, pages 299-311, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813233058_0013
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    2. Hoekman, Bernard, 2011. "Proposals for WTO reform : a synthesis and assessment," Policy Research Working Paper Series 5525, The World Bank.
    3. 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.
    4. Barbara Dluhosch & Daniel Horgos, 2013. "(When) Does Tit-for-tat Diplomacy in Trade Policy Pay Off?," The World Economy, Wiley Blackwell, vol. 36(2), pages 155-179, February.
    5. Richard Chisik, 2010. "Limited Incremental Linking and Unlinked Trade Agreements," Working Papers 023, Ryerson University, Department of Economics.
    6. Mei, Yuan, 2020. "Sustainable cooperation in international trade: A quantitative analysis," Journal of International Economics, Elsevier, vol. 123(C).
    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.
    8. Kuenzel, David J., 2017. "WTO dispute determinants," European Economic Review, Elsevier, vol. 91(C), pages 157-179.
    9. Nuno Limão & Kamal Saggi, 2018. "Size inequality, coordination externalities and international trade agreements," World Scientific Book Chapters, in: Policy Externalities and International Trade Agreements, chapter 11, pages 319-336, World Scientific Publishing Co. Pte. Ltd..
    10. 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.
    11. Vincent Anesi & Giovanni Facchini, 2019. "Coercive Trade Policy," American Economic Journal: Microeconomics, American Economic Association, vol. 11(3), pages 225-256, August.
    12. Soegaard, Christain, "undated". "An Oligopolistic Theory of Regional Trade Agreements," Economic Research Papers 270542, University of Warwick - Department of Economics.
    13. Filipe Martins & Alberto A. Pinto & Jorge P. Zubelli, 2022. "Welfare–Balanced International Trade Agreements," Mathematics, MDPI, vol. 11(1), pages 1-20, December.
    14. Benjamin Liebman & Kasaundra Tomlin, 2015. "World Trade Organization sanctions, implementation, and retaliation," Empirical Economics, Springer, vol. 48(2), pages 715-745, March.
    15. Kilolo, Jean-Marc Malambwe, 2013. "Country size, trade liberalization and transfers," MPRA Paper 47996, University Library of Munich, Germany.
    16. Richard Chisik & Chuyi Fang, 2024. "Cross‐retaliation and international dispute settlement," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(4), pages 1137-1181, November.
    17. Staiger, Robert & Bagwell, Kyle & Bown, Chad, 2015. "Is the WTO Passé?," CEPR Discussion Papers 10672, C.E.P.R. Discussion Papers.
    18. 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.
    19. Kyle Bagwell & Robert W. Staiger, 2016. "The Design of Trade Agreements," NBER Working Papers 22087, National Bureau of Economic Research, Inc.
    20. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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