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

Nuno Limão and Kamal Saggi , Journal of International Economics 76(1) , 48-60 , September 2008.

We analyze whether financial compensation is preferable to the WTO's current dispute settlement system that permits injured member countries to impose retaliatory tariffs. We show that, ex-post, monetary fines are more efficient than tariffs in terms of granting compensation to injured parties but 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 tariffs, they fail to yield a more cooperative outcome than the use of tariffs alone. Furthermore, the exchange of bonds between symmetric countries also does not improve enforcement relative to retaliatory tariffs.

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