Mandated Countertrade as a Strategic Commitment

Abstract

Mandated countertrade is a policy to restrict unilateral imports. A country’s government thereby in effect commits domestic firms not to purchase from a foreign trading partner unless there are reciprocal sales. We argue that the policy may be a rational response to fundamental contracting failures, our key assumption being that sellers are incompletely informed about buyers’ valuations. In line with observed practices, the analysis suggests that an optimal mandated countertrade policy will target high mark-up imports and low mark-up exports. Implications for global welfare are ambiguous and depend upon the extent of a double coincidence of wants.

Keywords: Mandated countertrade, Trade policy, Asymmetric information

JEL Classification: F13, F12