Tariff Retaliation Versus Financial Compensation in the Enforcement of International Trade Agreements

33 Pages Posted: 9 Oct 2006

See all articles by Nuno Limão

Nuno Limão

University of Maryland - Department of Economics

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

Abstract

The authors analyze whether financial compensation is preferable to the current system of dispute settlement in the World Trade Organization that permits member countries to impose retaliatory tariffs in response to trade violations committed by other members. They show that monetary fines are more efficient than tariffs in terms of granting compensation to injured parties when there are violations in equilibrium. However, fines suffer from an enforcement problem since they must be paid by the violating country. If fines must ultimately be supported by the threat of retaliatory tariffs, they fail to yield a more cooperative outcome than the current system. The authors also consider the use of bonds as a means of settling disputes. If bonds can be posted with a third party, they do not have to be supported by retaliatory tariffs and can improve the negotiating position of countries that are too small to threaten tariff retaliation.

JEL Classification: F23, F12

Suggested Citation

Limão, Nuno and Saggi, Kamal, Tariff Retaliation Versus Financial Compensation in the Enforcement of International Trade Agreements (April 2006). World Bank Policy Research Working Paper No. 3873. Available at SSRN: https://ssrn.com/abstract=935967

Nuno Limão

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-7842 (Phone)
301-405 3542 (Fax)

Kamal Saggi (Contact Author)

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States
214-768-3274 (Phone)
214-768-1821 (Fax)

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