Chapter 3: Trade Uncertainty and Trade Disruption
Uncertainty is a fact of life in international economic relations. Volatility of exchange rates, of (relative) prices and of trade flows in general influences the decisions of private firms and consumers and, consequently, determines (the possibilities for) foreign trade (see, for example, Ruffin 1974, Pomery 1984 and Kofman et al. 1990). Most of the literature considers uncertainty as an exogenous phenomenon, at least as unrelated to the levels of consumption, production, trade and so on. As we discussed in the previous chapter, Bhagwati and Srinivasan (1976), however, have argued that the possibility of quantitative trade restrictions (import quota, voluntary export restrictions, boycotts, and embargoes) may also be affected by the volume of one’s exports. This is relevant, because the importance of economic sanctions appears to be increasing at this point in history (see Figure 1.1 in Chapter 1). In addition, economic sanctions are increasingly being considered as a means to enforce international environmental protection conventions (Subramanian 1992), while strategic trade policy considerations may increase the demand for foreign trade sanctions too (Carter 1988). This chapter deals with the impact of uncertainty on the pattern of specialization and on the concomitant decisions about consumption and production. The analysis in the present chapter, however, does not restrict itself to the impact of politically inspired trade restrictions because it also covers economically motivated government intervention such as quantitative (‘voluntary’) export restrictions, like those studied in the seminal paper by Bhagwati and Srinivasan (1976), as well as uncertainty that results from strategic behaviour by...
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