DP139 | East-West Trade, Embargoes and Expectations

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01/11/1986

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Abstract

There are significant differences between the United States and Western Europe on policy towards East-West trade. Some of this is attributable to the divergent economic interests of different countries, but all countries' policies are influenced by political as well as economic considerations. This paper focuses on the role of expectations in distinguishing between the view of economic relations as giving rise to positive linkages with political relations and the alternative view of economic ties as providing political leverage. Multinational cooperation may be an important channel through which the economic system reacts to political risks, and a formal model is presented to analyse this issue. The conclusion of the paper is that there may be only very limited scope for the use of trade embargoes as a political and strategic tool.