Optimum Tariffs and Retaliation Revisited: How Country Size Matters

In his seminal work on tariff retaliation, Johnson (Review of Economic Studies, 21, 1953–1954) showed that a country will “win” a bilateral “tariff war” if its relative monopoly/monopsony power in world trade is sufficiently large. However, it is unclear from Johnson's analysis and from subsequ...

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Published inThe Review of economic studies Vol. 69; no. 3; pp. 707 - 727
Main Author Syropoulos, Constantinos
Format Journal Article
LanguageEnglish
Published Wiley-Blackwell 01.07.2002
Review of Economic Studies Ltd
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Abstract In his seminal work on tariff retaliation, Johnson (Review of Economic Studies, 21, 1953–1954) showed that a country will “win” a bilateral “tariff war” if its relative monopoly/monopsony power in world trade is sufficiently large. However, it is unclear from Johnson's analysis and from subsequent research on the subject how this power is determined in general economic environments. An important goal of this paper is to address this issue. With the help of a neoclassical trade model in which country size is at centre stage, it is shown that a sufficient condition for a country to prefer a non-cooperative Nash tariff equilibrium (retaliation) over free trade is that its relative size be sufficiently large. The paper also refines the structure of the general trade model and generates additional characterization results on the importance of country size for best-response tariff functions, retaliatory tariffs, and welfare.
AbstractList In his seminal work on tariff retaliation, Johnson ("Review of Economic Studies", 21, 1953-1954) showed that a country will "win" a bilateral "tariff war" if its relative monopoly/monopsony power in world trade is sufficiently large. However, it is unclear from Johnson's analysis and from subsequent research on the subject how this power is determined in general economic environments. An important goal of this paper is to address this issue. With the help of a neoclassical trade model in which country size is at centre stage, it is shown that a sufficient condition for a country to prefer a non-cooperative Nash tariff equilibrium (retaliation) over free trade is that its relative size be sufficiently large. The paper also refines the structure of the general trade model and generates additional characterization results on the importance of country size for best-response tariff functions, retaliatory tariffs, and welfare.
Abstract only
Author Syropoulos, Constantinos
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Snippet In his seminal work on tariff retaliation, Johnson (Review of Economic Studies, 21, 1953–1954) showed that a country will “win” a bilateral “tariff war” if its...
In his seminal work on tariff retaliation, Johnson ("Review of Economic Studies", 21, 1953-1954) showed that a country will "win" a bilateral "tariff war" if...
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StartPage 707
SubjectTerms Elasticity of demand
Endowments
F13
Free trade
Nash equilibrium
Price elasticity
Retaliation
Tariffs
Terms of trade
Trade policy
War
Title Optimum Tariffs and Retaliation Revisited: How Country Size Matters
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