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A theory of dynamic tariff and quota retaliation

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  • Naqvi, Nadeem

Abstract

This paper establishes relationships between static Nash equilibria and dynamic Markov perfect equilibria of tariff and quota retaliation games. In supermodular games where tariffs are strategic complements, the steady state of every, symmetric Markov perfect equilibrium must have lower tariffs than in the static equilibrium. If tariffs are strategic substitutes, tariffs in the dynamic game are higher than in the static equilibrium. The supermodular case is extended to quota competition. Instead of the well-known non-equivalence between tariff and quota retaliation outcomes under complete myopia, in some circumstances, free trade can be supported in the steady state of a Markov perfect equilibrium, regardless of whether policies employed are quotas or tariffs. We reach the conclusion that the effect of introducing dynamics crucially depends on whether the policy instruments employed by the countries are strategic substitutes or complements irrespective of whether they are tariffs or quotas.

Suggested Citation

  • Naqvi, Nadeem, 2010. "A theory of dynamic tariff and quota retaliation," MPRA Paper 27656, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:27656
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    References listed on IDEAS

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    1. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, April.
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    5. Harry G. Johnson, 1953. "Optimum Tariffs and Retaliation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 21(2), pages 142-153.
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    7. Taiji Furusawa, 2004. "Threats and Promises in Tariff Setting," Econometric Society 2004 Far Eastern Meetings 635, Econometric Society.
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    1. Safet KURTOVIC & Blerim HALILI & Nehat MAXHUNI, 2017. "The effect of preferential tariffs of the EU: Some evidence from B&H," Journal of Economics and Political Economy, KSP Journals, vol. 4(3), pages 247-262, September.

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    More about this item

    Keywords

    Foreign trade policy; Tariff; Quota; Retaliation; Dynamic Game; Markov perfect equilibrium; Supermodular games;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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