A neat idea I first read about in Fair Trade For All apparently has both a longer history and a richer theoretical exposition than I realized.

In 2002, Mexico proposed that the WTO make retaliatory tariff rights tradable, so that countries that would only hurt themsleves by imposing sanctions might still pose a punitive threat to the subject of complaints at the trade body’s dispute settlement mechanism. This sounds like a great idea to me.

Bagwell, Mavroidis & Staiger have an academic paper on the subject: The Case for Auctioning Countermeasures in the WTO. Their result is a bit surprising:

We then consider an extended auction, in which the home country is also allowed to bid to retire the right of retaliation. The extended auction is again characterized by positive externalities between foreign countries. But the extended auction also features negative externalities, since the home country experiences a negative externality whenever a foreign country wins. In the extended auction, we find that auction failure does not occur; in fact, the home country always wins and the retaliation right is therefore always retired.

It’s an odd outcome, but instituting the auction does result in the violator paying compensation, so it sounds better than the status quo. But Bagwell is cautious (pdf) in making a policy recommendation:

[Bagwell, Mavroidis & Staiger] do not claim to answer this question, though, since a system with tradable retaliation rights would generate additional costs and benefits that are not included in their formal analysis. One un-modeled benefit is that the prospect of auction revenue might enable a small and developing country to attract private legal support for WTO legal actions that it would not otherwise be able to afford. Under the heading of un-modeled costs, it is important to
list the possibility that the revenue generated by auctions could result in nuisance cases and excessive use of the WTO dispute settlement system. Another potential cost is that a system of tradable retaliation rights might cause bilateral trade tensions to grow into multilateral tensions. Acrimony across governments could grow, and future negotiations could be undermined…

The costs of a system with tradable retaliation rights could well exceed the benefits. At this stage, I therefore caution against any explicit change in the DSU to accommodate tradable retaliation rights.

True, there are many costs and benefits not examined by a formal auction model, but how does one research the likelihood of nuisance cases or acrimony? I don’t we’re likely to see significant academic progress on whether auctioning countermeasures would be net beneficial, so policymakers ought to start discussing it seriously.

[The general merits of making tort claims transferrable will be familiar to those who have read David Friedman’s Law’s Order.]