TARIFF RETALIATION AND THE FREE TRADE ARGUMENT

José Méndez Naya () and Luciano Méndez Naya
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José Méndez Naya: Universidade de A Coruña, Facultade de Ciencias Económicas e Empresariais, Campus de Elviña s/n. 15071 A Coruña, Spain
Luciano Méndez Naya: Universidade de Santiago, Spain

International Game Theory Review (IGTR), 2007, vol. 09, issue 04, 657-666

Abstract: The effects of tariff wars on welfare are analysed for the case of trade between two countries with outputs of the traded good given exogenously. Assuming mild conditions, it is shown that if there are non-zero tariffs for which welfare-maximizing equilibrium holds, then free trade is not strictly preferable when the countries' outputs are equal, and if they are not equal is strictly disadvantageous to the country with the smaller output. Therefore, the main result of the paper is that free trade is not sustainable in an asymmetric context nor in a symmetric situation.

Keywords: Commercial policy; trade negotiations; market structure and firms strategy; multinational firms; free trade; J.E.L. Classification: F13; J.E.L. Classification: L1; J.E.L. Classification: F23 (search for similar items in EconPapers)
JEL-codes: B4 C0 C6 C7 D5 D7 M2 (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1142/S0219198907001643

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