The Bilateral Manufactures Balance of Trade Between the U.S. and Japan, Protectionism, Game Theory, and « The Free Trade Domain »

Starting from the observations that the U.S. is faced with a considerable deficit of its manufactures balance of trade with Japan and that strong interna1 pressures for intervention are present, the author calculates several scenarios with an empirical world trade model of protectionist trade interventions from the U.S. side vis-à-vis Japan. It is pointed out in what way game-theoretical concepts can be applied and the issues of retaliation and escalation are addressed and explicitly included in the simulations. Effects of trade interventions are calculated for the U.S. and Japan ns well as far third countries. Finally, the concept of a « free trade domain » is introduced as no area in the space of possible strategies, bounded by critical weights in the national evaluation functions, in which free trade rather than intervention should he advocated.