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

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  • David M. Gould
  • Graeme L. Woodbridge

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.
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Suggested Citation

  • David M. Gould & Graeme L. Woodbridge, 1993. "Retaliation, liberalization, and trade wars: the political economy of nonstrategic trade policy," Working Papers 9323, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:9323
    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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    References listed on IDEAS

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    1. Grossman, Gene M & Helpman, Elhanan, 1995. "Trade Wars and Trade Talks," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 675-708, August.
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    Cited by:

    1. Hallett Andrew Hughes & Braga C. A. Primo, 1994. "The New Regionalism and the Threat of Protectionism," Journal of the Japanese and International Economies, Elsevier, vol. 8(4), pages 388-421, December.

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    Keywords

    International trade; Free trade;

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