Template-Type: ReDIF-Paper 1.0
Author-Name: Richard Chisik
Author-X-Name-First: Richard
Author-X-Name-Last: Chisik
Author-Email: rchisik@economics.ryerson.ca 
Author-Workplace-Name: Department of Economics, Ryerson University, Toronto, Canada
Author-Name: Chuyi Fang
Author-X-Name-First:  Chuyi
Author-X-Name-Last: Fang
Author-Email: chuyi.fang@shu.edu.cn
Author-Workplace-Name: Department of Economics and Finance, Sydney Institute of Language and Commerce, Shanghai University, Shanghai, 201800, China
Author-Name: 
Author-X-Name-First:    
Author-X-Name-Last: 
Author-Email: 
Author-Workplace-Name:  
Title: Cross-retaliation and International Dispute Settlement
Abstract: Although politicians and the popular press often express the desire to link retaliation in trade agreements to non-trade issues, the WTO discourages and usually disallows cross-retaliation even among its own agreements. In this paper we analyze the WTO's reticence to embrace cross-retaliation. We take a dynamic mechanism design approach and compare two different mechanisms in a two-country multi-sector tariff-setting political-economy model with incomplete information. In a same-sector retaliation mechanism a safeguard action, or other limited violation of the international trade agreement, is punished by an equivalent suspension of concessions in the sector where the initial deviation takes place. In a linked, or cross-sector, retaliation mechanism, retaliatory actions may be taken in another sector or agreement. We also consider less-than-equivalent suspensions of concessions whereby the probability of retaliation is less than unity. We then endogenize this probability and derive its optimal level separately for same- and cross-sector retaliation. Finally we consider the long-run viability of these self-enforcing trade agreements. We show that whether retaliation is certain, probabilistic and the same for both same- and cross-sector agreements, or probabilistic and separately optimal for each type of agreement, a cross-sector retaliation mechanism can generate greater welfare and self-enforcement capability than a same-sector mechanism.
Creation-Date: 2021-07
Number: 078
File-URL: http://economics.ryerson.ca/workingpapers/wp078.pdf
File-Format: Application/pdf
Handle: RePEc:rye:wpaper:wp078