Ability for the government to set international trade tariffs to influence foreign trade

We study a general equilibrium model of trade with two goods and manycountries where each country sets its distortionary tariff non-cooperatively to maximize the payoff of the representative household. We prove the existence of pure strategy Nash equilibria by showing that there are consistent bounds on tariff rates that are common across countries and that payoff functions in the induced game are quasiconcave. Separately, we show that best responses are strictly increasing functions, and provide robust examples that show that the game need not be supermodular. The fact that a country’s payoff does not respond monotonically to increases in a competitor’s tariff rate, shows that the standard condition in the literature for payoff comparisons across Nash equilibria fails in our model. We then show that the participation of at most two countries in negotiated tariff changes suffices to induce a Pareto improving allocation relative to a Nash equilibrium. Further results provided concern the location of the best response in relation to the free trade point, the monotonicity of payoffs, and the bounds on equilibrium strategies. The final result is that there is no trade if and only if the equilibrium The ability to impose a tariff is arguably the tool most commonly used by a government to influence foreign trade. This is done to benefit the country as it moves the equilibrium allocation in an appropriate direction away from free trade. Since retaliation is only to be expected, the resulting strategic equilibrium becomes the object of analysis; importantly, the allocation induced is, quite generally, inefficient. This sets the stage for a role for institutions that regulate and promote international trade to attempt to mitigate the inefficiency by facilitating the negotiation of multilateral agreements. The heterogeneity across countries,

Keywords:

Retaliatory tariffs , Multi-country , Pure strategy Nash equilibrium