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(When) Does Tit-for-Tat Diplomay in Trade Policy Pay Off?

  • Dluhosch, Barbara

    ()

    (Helmut Schmidt University, Hamburg)

  • Horgos, Daniel

    ()

    (Helmut Schmidt University, Hamburg)

In international relations, short-run incentives for non-cooperation often dominate. Yet, (external) institutions for enforcing cooperation are hampered by national sovereignty, supposedly strengthening the role of selfenforcing mechanisms. This paper examines their scope with a focus on contingent protection aka tit-for-tat in trade policy. By highlighting various strategies in a (linear) partial-equilibrium framework, we show that retaliation of noncooperative behavior by limiting market access works as a disciplining device independently of supply and demand parameters. Our theoretical results are backed by empirical evidence that countries more frequently involved in WTO-mediated disputes entailing tit-for-tat strategies pursue on average more liberal trade regimes.

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Paper provided by Helmut Schmidt University, Hamburg in its series Working Paper with number 116/2012.

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Length: 48 pages
Date of creation: 26 Mar 2012
Date of revision:
Handle: RePEc:ris:vhsuwp:2012_116
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  1. MARTIN, Alberto & VERGOTE, Wouter, 2007. "On the role of retaliation in trade agreements," CORE Discussion Papers 2007089, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Rose, Andrew K, 2002. "Do We Really Know that the WTO Increases Trade?," CEPR Discussion Papers 3538, C.E.P.R. Discussion Papers.
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  5. Bown, Chad P. & Ruta, Michele, 2008. "The economics of permissible WTO retaliation," WTO Staff Working Papers ERSD-2008-04, World Trade Organization (WTO), Economic Research and Statistics Division.
  6. Pelc, Krzysztof J., 2010. "Constraining Coercion? Legitimacy and Its Role in U.S. Trade Policy, 1975–2000," International Organization, Cambridge University Press, vol. 64(01), pages 65-96, January.
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  11. Petros C. Mavroidis & Patrick A. Messerlin & Jasper M. Wauters, 2008. "The Law and Economics of Contingent Protection in the WTO," Books, Edward Elgar, number 12731, 6.
  12. Bowen, T. Renee, 2010. "Limits of the WTO as a Self-Enforcing Institution," Research Papers 2071, Stanford University, Graduate School of Business.
  13. Rodney D. Ludema & Anna Maria Mayda, 2010. "Do Terms-of-Trade Effects Matter for Trade Agreements? Evidence from WTO Countries," Development Working Papers 293, Centro Studi Luca d\'Agliano, University of Milano.
  14. Keohane, Robert O., 1986. "Reciprocity in international relations," International Organization, Cambridge University Press, vol. 40(01), pages 1-27, December.
  15. Barbara J. Spencer & James A. Brander, 1982. "Tariff Protection and Imperfect Competition," Working Papers 517, Queen's University, Department of Economics.
  16. 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.
  17. Bhagwati, Jagdish, 1990. "Departures from Multilateralism: Regionalism and Aggressive Unilateralism," Economic Journal, Royal Economic Society, vol. 100(403), pages 1304-17, December.
  18. Schwartz, Warren F & Sykes, Alan O, 2002. "The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization," The Journal of Legal Studies, University of Chicago Press, vol. 31(1), pages S179-204, January.
  19. Christopher S. P. Magee & Stephen P. Magee, 2008. "The United States is a Small Country in World Trade," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 990-1004, November.
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