Working Paper: CEPR ID: DP5560
Authors: Nuno Limo; Kamal Saggi
Abstract: We 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. We 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. We 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.
Keywords: Bonds; Concessions; Dispute Settlement; Monetary Fines; Reciprocity; Tariffs; WTO
JEL Codes: F12; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary fines (E42) | compensation for injured parties (K13) |
| fines face enforcement challenges (K40) | violator's willingness to pay (K49) |
| fines backed by retaliatory tariffs (F18) | cooperation outcome (C71) |
| bonds with third party (L14) | improved enforcement outcomes (K40) |
| bonds eliminate need for retaliatory tariffs (F10) | negotiation effectiveness for small countries (F51) |
| fines generate higher compensation (K13) | welfare gain exceeds welfare cost of tariffs (D69) |
| payoffs to injured countries higher under fines (K13) | potential Pareto improvement (D61) |