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DP10687 | Coercive Trade Policy

Publication Date

05/07/2015

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Abstract

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.