Threats or Promises? A Built-in Mechanism of Gradual Reciprocal Trade Liberalization

Taiji Furusawa and Takashi Kamihigashi

No DP2011-27, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: We analyze an infinitely repeated tariff-setting game played by two large countries with alternating moves. We focus on the subgame perfect equilibria in which each country chooses its tariff according to a stationary function of the other country's tariff. We show that there are many equilibria with two steady states, one with higher tariffs (but still lower than the static Nash tariffs), the other with lower tariffs. We also show that there is a special class of equilibria in which there exists a unique, globally stable steady state. In both types of equilibria, one country unilaterally reduces its tariff from the static Nash equilibrium, the other country reciprocates in response to the first country's implicit "promise" to lower its tariff even further, and this process continues forever, converging to a steady state with tariffs lower than the static Nash tariffs. Therefore, promises, rather than threats, induce countries to gradually reduce their tariffs.

JEL-codes: C73 F13 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2011-09, Revised 2012-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2011-27.pdf Revised version, 2011 (application/pdf)

Related works:
Journal Article: THREATS OR PROMISES? A BUILT-IN MECHANISM OF GRADUAL RECIPROCAL TRADE LIBERALIZATION (2012)
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