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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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