Geopolitics and Rule-Based Trade

Thomas Gehrig and Rune Stenbacka

No 22049, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze the stability of rule-based trade when trading partners differ in their geopolitical objectives. We show that asymmetric gains from trade and geopolitical benefits can generate asymmetric equilibria in which one country infringes and the other tolerates the violation even though there is repeated trade. Crucially, cooperation cannot be sustained when retaliation is more costly to the injured country than tolerating the infringement. Rule-based trade, therefore, requires not only sufficiently patient partners but also sufficiently severe losses from infringement relative to the gains from continued trade. The analysis highlights how geopolitics induce fundamental limitations of trade agreements.

Keywords: asymmetric equilibrium; rule-based trade; Trade agreements; infringements; Enforcement (search for similar items in EconPapers)
JEL-codes: C73 D74 F13 F51 (search for similar items in EconPapers)
Date: 2026-10
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