Who starts the trade war? A theory of export controls and quid pro quo

Zi Wang and Yanling Zhou

The World Economy, 2021, vol. 44, issue 10, 2950-2965

Abstract: China has been accused of its quid pro quo policy which requires multinational firms to transfer technologies in return for market access. What is less well‐known is that developed countries have imposed export controls on a large variety of high‐tech products to China. We develop a simple two‐country model to understand the motives and consequences of these nontraditional trade and FDI policies. Under certain regularity conditions, we show that the coexistence of export controls and quid pro quo is the unique Nash equilibrium in this game. Comparing to the world without policy interventions, both countries are worse off in the noncooperative equilibrium. Therefore, both countries can benefit from international cooperation on knowledge sharing.

Date: 2021
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