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

Authors


  •  In distinguishing external and internal institutions, we draw on Lachmann (1986) whose institutional taxonomy has been subsequently refined by Kasper and Streit (1999).

  •  Notably, this does not apply to what has been dubbed by Bhagwati (1990, 1312 et seq.) ‘aggressive unilateralism’, that is, the threat of a country to close its markets for foreign competitors in order to extract trade ’concessions’ from the other country. See also Silverman (1996) for a critical evaluation.

Abstract

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 self-enforcing mechanisms. This paper examines their scope with a focus on contingent protection aka tit-for-tat in trade policy. Highlighting various strategies in a partial equilibrium framework, we show that retaliation of non-cooperative behaviour by limiting market access works as a disciplining device quite independently of supply and demand parameters. Our empirical findings are consistent with the theoretical results in 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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