Retaliation, liberalization, and trade wars: the political economy of nonstrategic trade policy

David Gould and Graeme L. Woodbridge

No 9329, Working Papers from Federal Reserve Bank of Dallas

Abstract: In this paper, we examine the dynamic process behind protection, retaliation, and trade wars. Consistent with empirical evidence on the development of trade policies, we model policy decisions as an outcome of political contests within two trading nations, rather than as an outcome of a strategic game between two governments. Uncertainty about the incidence and success of retaliation yields a dynamic political equilibrium in which one country imposes a tariff that increases gradually over time. Eventually, the cost of the tariff to the other country's exporting interests induces retaliation. We show that depending on the characteristics of the markets in the two countries, retaliation may encourage liberalization or may cause a trade war.

Pages: 35 pages
Date: 1993-07-01
Note: Published as: Gould, David M. and Graeme L. Woodbridge (1998), "The Political Economy of Retaliation, Liberalization and Trade Wars," European Journal of Political Economy 14 (1): 115-137.
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Working Paper: Retaliation, liberalization, and trade wars: the political economy of nonstrategic trade policy (1993)
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