On the Role of Retaliation in Trade Agreements
(2007)
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- Abstract
- This paper analyzes the role of retaliation in trade agreements. It shows that, in the presence of private information, relatialtion 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 fahsion might be optimal. The model is used to interpret the increase in the retaliatory use of antidumping duties observed over the last decades.
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Citations
Martin, A., & Vergote, W. (2007). On the Role of Retaliation in Trade Agreements (CEREC Working Papers 2007/1).