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Re-Assessing The Impact of Crisis On Cooperation: The Case of International Trade

Krzysztof Pelc
McGill University
Krzysztof Pelc
McGill University
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Abstract

The conventional wisdom holds that hard times increase the costs of compliance with international commitments, and thus render defections more likely. What such accounts ignore is that hard times also increase the negative consequences of such defections, as evident in the US 1930 Smoot-Hawley tariff and the trade war that ensured. Given these balancing considerations, this article reassesses the effects of the crisis on compliance with both the letter and the spirit of WTO law, by looking at whether the prospect of a spiral of defection precisely at a time when such spirals are most costly leads to some measure of restraint. Our contribution is to analyze variation among crises in terms of the extent to which hard times are shared. We look first at prevalence of economic crisis across countries within the trading system and second at scope of crisis impact across industries within a country. We hypothesize that the prevalence of an exogenous shock, all other things equal, should exert countervailing pressure to reduce non-compliance. Specifically, when a country’s main trade partners/industries are equally affected by a crisis, it will be less likely to use mea- sures such as trade remedies, competitive devaluations, and tariffs (raising applied tariffs to the bound rate) than in cases where the crisis is more localized. Empirical tests provide support for this claim: looking at the period from 1995 to 2010, we demonstrate that the same exogenous shock in a given country or industry is less likely to lead to defections when that shock is shared by a country’s trading partners. We also show how institutions play an important role in driving such restraint, by providing credible information about trading partners’ behavior, as well as a forum in which to signal a country’s restraint and call on others to do the same.