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On the role of retaliation in trade agreements

  • MARTIN, Alberto
  • VERGOTE, Wouter

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

This paper analyzes the role of retaliation in trade agreements. It shows that, in the presence of private information, retaliation can always be used to increase the welfare derived from such agreements by the participating governments. In particular, it is shown that retaliation is a necessary feature of any efficient equilibrium. We argue that retaliation would not be necessary if governments could resort to international transfers or export subsidies to compensate for terms-of-trade externalities. Within the current world trading system, though, in which transfers are seldom observed whereas export subsidies are prohibited, the use of the remaining trade instruments in a retaliatory fashion might be optimal. The model is used to interpret the retaliatoy use of antidumping observed in the last decades, and the proliferation of these measures relative to other trade remedies.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2007089.

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Date of creation: 01 Nov 2007
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Handle: RePEc:cor:louvco:2007089
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  1. Thomas J. Prusa & Susan Skeath, 2001. "The Economic and Strategic Motives for Antidumping Filings," NBER Working Papers 8424, National Bureau of Economic Research, Inc.
  2. Thomas J. Prusa, 2001. "On the spread and impact of anti-dumping," Canadian Journal of Economics, Canadian Economics Association, vol. 34(3), pages 591-611, August.
  3. Susan Athey & Kyle Bagwell, 1999. "Optimal Collusion with Private Information," Working papers 99-17, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Blonigen, Bruce A. & Bown, Chad P., 2003. "Antidumping and retaliation threats," Journal of International Economics, Elsevier, vol. 60(2), pages 249-273, August.
  5. Bagwell, Kyle & Staiger, Robert W, 1990. "A Theory of Managed Trade," American Economic Review, American Economic Association, vol. 80(4), pages 779-95, September.
  6. repec:aei:rpbook:24565 is not listed on IDEAS
  7. Hopenhayn, Hugo A. & Skrzypacz, Andrzej, 2001. "Tacit Collusion in Repeated Auctions," Research Papers 1698r2, Stanford University, Graduate School of Business.
  8. Riezman, Raymond, 1991. "Dynamic tariffs with asymmetric information," Journal of International Economics, Elsevier, vol. 30(3-4), pages 267-283, May.
  9. Hylke Vandenbussche & Maurizio Zanardi, 2008. "What explains the proliferation of antidumping laws," ULB Institutional Repository 2013/9819, ULB -- Universite Libre de Bruxelles.
  10. repec:dgr:uvatin:20040011 is not listed on IDEAS
  11. Kyle Bagwell & Robert W. Staiger, 1997. "Reciprocity, Non-discrimination and Preferential Agreements in the Multilateral Trading System," NBER Working Papers 5932, National Bureau of Economic Research, Inc.
  12. David A. Miller, 2005. "The dynamic cost of ex post incentive compatibility in repeated games of private information," Game Theory and Information 0510002, EconWPA.
  13. Kyle Bagwell & Robert W. Staiger, 1997. "An Economic Theory of GATT," NBER Working Papers 6049, National Bureau of Economic Research, Inc.
  14. Masaki Aoyagi, 2005. "Collusion through mediated communication in repeated games with imperfect private monitoring," Economic Theory, Springer, vol. 25(2), pages 455-475, 02.
  15. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  16. Bown, Chad P., 2002. "Why are safeguards under the WTO so unpopular?," World Trade Review, Cambridge University Press, vol. 1(01), pages 47-62, March.
  17. Susan Athey & Kyle Bagwell & Chris Sanchirico, 1998. "Collusion and Price Rigidity," Working papers 98-23, Massachusetts Institute of Technology (MIT), Department of Economics.
  18. Hungerford, Thomas L., 1991. "GATT: A cooperative equilibrium in a noncooperative trading regime?," Journal of International Economics, Elsevier, vol. 31(3-4), pages 357-369, November.
  19. Susan Athey & David Miller, 2006. "Efficiency in Repeated Trade with Hidden Valuations," Levine's Bibliography 784828000000000256, UCLA Department of Economics.
  20. Thomas Klitgaard & Karen Schiele, 1998. "Free versus fair trade: the dumping issue," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 4(Aug).
  21. Moore, Michael O, 1992. "Rules or Politics? An Empirical Analysis of ITC Anti-dumping Decisions," Economic Inquiry, Western Economic Association International, vol. 30(3), pages 449-66, July.
  22. Hansen, Wendy L & Prusa, Thomas J, 1997. "The Economics and Politics of Trade Policy: An Empirical Analysis of ITC Decision Making," Review of International Economics, Wiley Blackwell, vol. 5(2), pages 230-45, May.
  23. Robert M. Feinberg & Kara M. Reynolds, 2006. "The Spread of Antidumping Regimes and the Role of Retaliation in Filings," Southern Economic Journal, Southern Economic Association, vol. 72(4), pages 877–890, April.
  24. Feenstra, Robert C & Lewis, Tracy R, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1287-307, November.
  25. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 394, David K. Levine.
  26. Edward J Green & Robert H Porter, 1997. "Noncooperative Collusion Under Imperfect Price Information," Levine's Working Paper Archive 1147, David K. Levine.
  27. Aoyagi, Masaki, 2003. "Bid rotation and collusion in repeated auctions," Journal of Economic Theory, Elsevier, vol. 112(1), pages 79-105, September.
  28. Park, Jee-Hyeong, 2000. "International trade agreements between countries of asymmetric size," Journal of International Economics, Elsevier, vol. 50(2), pages 473-495, April.
  29. Kyle Bagwell & Robert W. Staiger, 2004. "Enforcement, Private Political Pressure and the GATT/WTO Escape Clause," NBER Working Papers 10987, National Bureau of Economic Research, Inc.
  30. Bown, Chad P., 2005. "Trade remedies and World Trade Organization dispute settlement : Why are so few challenged?," Policy Research Working Paper Series 3540, The World Bank.
  31. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
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