Tradeable Import Certificates for Strategic Supply Security

Abstract

Recent crises have made supply security central to trade policy. We show how tradeable import certificates (TIC) implement targets for domestic production and reliable foreign supply while preserving gains from trade. A single certificate market per country decentralizes the welfare-maximizing allocation under heterogeneous targets, with certificate prices adjusting endogenously as conditions change. TIC robustly protect these targets against a range of deviations from trade agreements. A model of economic coercion microfounds the targets, linking them to shortage salience, supply reliability, bilateral trade dependence, and norms against yielding to coercion. Tariff-subsidy agreements require more information and are more vulnerable to hidden deviations. While a common carbon price provides a natural focal point for climate agreements, quantity-based security targets could be a more natural focal point for trade agreements than tariff and subsidy rates.