The Effects of Dispute Settlements on the Trade Agreements: A Continuous Model

This paper is a continuous extension of the paper Maggi and Staiger (2011) in two aspects that both the state space and trading policy space are continuous instead of binary discrete. And the WTO Dispute Settlement Body(DSB) will have the binary ruling-free trade or notonce a dispute is invoked between importing and exporting countries. In the static game, the findings are basically a refinement of those in Maggi and Staiger (2011) such as there is no free trade unless it’s the ruling of the WTO DSB and the empty contract will always be dominated by the vague contract. Another contribution of this paper is to find an innovative way to model the strength of the precedent in the dynamic games,i.e., the DSB ruling at a specific state can be automatically applied to its neighboring states. For the cases when disputes will be invoked in the future, the optimal choice of precedent strength is to make the exporter country file complaint whenever there is protection(which is defined as “No Tolerance" rule in the paper). Otherwise, it’s optimal to have no precedent.