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

  • Barbara Dluhosch
  • Daniel Horgos

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 non- cooperative 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 FIW in its series FIW Working Paper series with number 085.

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Length: 45
Date of creation: May 2012
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Handle: RePEc:wsr:wpaper:y:2012:i:085
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