DP10687 Coercive Trade Policy
|Author(s):||Vincent Anesi, Giovanni Facchini|
|Publication Date:||July 2015|
|Keyword(s):||Dispute Settlement, GATT, Political Economy, WTO|
|JEL(s):||F12, F16, L11|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10687|
Empirical evidence suggests trade coercion exercised unilaterally is significantly less likely to induce concessions than coercion exercised through an international organization. In this paper we build a two-country model of coercion that can provide a rationale for this finding, and for how ``weak'' international institutions might be effective, even if their rulings cannot be directly enforced. In particular we show that if coercion is unilateral, the country requesting the policy change will demand a concession so substantial to make it unacceptable to its partner, and a trade war will ensue. If the parties can instead commit to an international organization (IO), compliance is more likely, because the potential IO ruling places a cap on the Foreign government's incentives to signal its resolve.