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Trade Agreements with Limited Punishments

CSGR Working Paper No. 87/02

January 2002

This paper shows that free trade can never be achieved when punishment for deviation from a trade agreement is limited to ‘a withdrawal of equivalent concessions’. This is where retaliation is not allowed to entail higher tariffs than those set by the initial deviant, and is the most severe form of punishment allowed under WTO rules. If, in addition, deviations from agreements are also limited in some way, then efficient self-enforcing tariff reductions must be gradual.

Keywords: Nash tariffs, Free Trade, Gradualism, Trade agreement, World Trade Organisation (WTO)

Jel classification: FO2, F13, F15, C73

Address for correspondence

Professor Ben Lockwood & Ben Zissimos
CSGR
University of Warwick
Coventry
CV4 7AL, UK
Email: B.lockwood@warwick.ac.uk / b.c.zissimos@warwick.ac.uk