Coercive trade policy

Vincent Anesi and Giovanni Facchini

In international trade disputes, coercion is often used against governments whose trade practices are deemed unfair. Trade coercion occurs when a sender government makes a demand backed by threats to use retaliatory sanctions against a target government if the latter does not acquiesce to this demand. There are typically two distinct methods of trade coercion: it can be exercised unilaterally or through multilateral institutions (e.g. GATT and WTO). In the case of unilateral coercion, the sender government makes a demand and (if necessary) retaliates one-sidedly, unconstrained by international obligations. In the case of multilateral coercion, the sender uses instead an international institution's framework for trade dispute resolution.

In this Nottingham School of Economics working paper, published in the American Economic Journal: Microeconomics, Vincent Anesi and Giovanni Facchini build on an empirical puzzle to develop a theory of trade coercion. The puzzle concerns the effectiveness of unilateral and multilateral coercions in getting target countries to concede to senders' demands: Existing empirical evidence reveals in fact that a target of trade coercion from the US is significantly less likely to concede when coercion is unilateral than when it is multilateral. Given that neither GATT nor the WTO possess centralized enforcement power, the fact that these multilateral institutions can increase the chances of a sender government obtaining a concession presents an empirical puzzle. Why does unilateral coercion significantly reduce the likelihood of a target conceding? How can international trade institutions be effective if defendants can reject adverse rulings with impunity? The authors address these questions by developing a model, in which sender governments may signal their resolve by demanding more concessions from target governments. They show how the temptation to exaggerate can reduce the likelihood of targets conceding. This problem is especially severe when the sender government is not (fully) committed to a multilateral dispute settlement mechanism. Then, unbound by international commitments, the sender may make excessive demands which are unacceptable to its target. Institutions through which demands are channelled thus matter to coercion outcomes.

American Economic Journal: Microeconomics, “Coercive trade policy”, by Vincent Anesi and Giovanni Facchini. https://www.aeaweb.org/articles?id=10.1257/mic.20170085

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