Trade Restrictions and Trade Reversal: Lessons from the U.S.-Canada Herring Dispute

This paper analyzes international trade in value added products when free trade and perfect competition in the market for an intermediate product, such as raw fish, are the exception rather than the rule. Current evidence from the General Agreement on Tariffs and Trade (GATT) regarding disputes between countries, such as the V.S.-Canada dispute over trade in raw herring, suggests that bilateral trade in raw fish among major exporters of seafood products may not be completely free of structural and political barriers. The study presents models showing that restrictions on the exportation of raw fish from an exporting country can make possible monopsony behavior by fish processors in a rival exporting country and they outline the market behavior of the players under such circumstances. The analysis illustrates how, under such conditions, economic forces contribute to the creation of trade disputes. It further demonstrates how expansion of the demand for final product may, through trade reversal pressures, dilute the market power of the processor monopsony and make trade restriction policies irrelevant.