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. ...
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.
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