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Tariff Retaliation versus Financial Compensation in the Enforcement of International Trade Agreements

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  • Limão, Nuno
  • Saggi, Kamal

Abstract

We analyze whether financial compensation is preferable to the current system of dispute settlement in the World Trade Organization that permits member countries to impose retaliatory tariffs in response to trade violations committed by other members. We show that monetary fines are more efficient than tariffs in terms of granting compensation to injured parties when there are violations in equilibrium. However, 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 retaliatory tariffs, they fail to yield a more cooperative outcome than the current system. We also consider the use of bonds as a means of settling disputes. If bonds can be posted with a third party, they do not have to be supported by retaliatory tariffs and can improve the negotiating position of countries that are too small to threaten tariff retaliation.

Suggested Citation

  • Limão, Nuno & Saggi, Kamal, 2006. "Tariff Retaliation versus Financial Compensation in the Enforcement of International Trade Agreements," CEPR Discussion Papers 5560, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5560
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    Cited by:

    1. Hoekman, Bernard, 2011. "Proposals for WTO reform : a synthesis and assessment," Policy Research Working Paper Series 5525, The World Bank.
    2. 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.
    3. 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.
    4. 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.
    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. Soegaard, Christain, 2013. "An Oligopolistic Theory of Regional Trade Agreements," Economic Research Papers 270542, University of Warwick - Department of Economics.
    8. 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.
    9. Kuenzel, David J., 2017. "WTO dispute determinants," European Economic Review, Elsevier, vol. 91(C), pages 157-179.
    10. 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..
    11. 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.
    12. Vincent Anesi & Giovanni Facchini, 2019. "Coercive Trade Policy," American Economic Journal: Microeconomics, American Economic Association, vol. 11(3), pages 225-256, August.
    13. Benjamin Liebman & Kasaundra Tomlin, 2015. "World Trade Organization sanctions, implementation, and retaliation," Empirical Economics, Springer, vol. 48(2), pages 715-745, March.
    14. Kilolo, Jean-Marc Malambwe, 2013. "Country size, trade liberalization and transfers," MPRA Paper 47996, University Library of Munich, Germany.
    15. 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.
    16. Kyle Bagwell & Robert W. Staiger, 2016. "The Design of Trade Agreements," NBER Working Papers 22087, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    bonds; concessions; dispute settlement; monetary fines; reciprocity; tariffs; WTO;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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