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Geopolitics and Rule-Based Trade

Author

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  • Gehrig, Thomas
  • Stenbacka, Rune

Abstract

We analyze the stability of rule-based trade when trading partners differ in their geopolitical objectives. We show that asymmetric gains from trade and geopolitical benefits can generate asymmetric equilibria in which one country infringes and the other tolerates the violation even though there is repeated trade. Crucially, cooperation cannot be sustained when retaliation is more costly to the injured country than tolerating the infringement. Rule-based trade, therefore, requires not only sufficiently patient partners but also sufficiently severe losses from infringement relative to the gains from continued trade. The analysis highlights how geopolitics induce fundamental limitations of trade agreements.

Suggested Citation

  • Gehrig, Thomas & Stenbacka, Rune, 2026. "Geopolitics and Rule-Based Trade," CEPR Discussion Papers 22049, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:22049
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    File URL: https://cepr.org/publications/DP22049
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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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