Paper #914

Title:

On the role of retaliation in trade agreements

Authors:

Alberto Martin and Wouter Vergote

Date:

June 2005 (Revised: April 2008)

Abstract:

This paper analyzes the role of retaliation in trade agreements. It shows that, in the presence of private information, retaliation 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 fashion might be optimal. The model is used to interpret the retaliatory use of antidumping observed in the last decades, and the proliferation of these measures relative to other trade remedies.

Keywords:

Tariffs, Retaliation, Asymmetric Information, WTO, Antidumping Duties

JEL codes:

C72, D82, F13

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of International Economics, 76 (1) 2008, 61-77

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