Optimum Tariffs and Retaliation Revisited: How Country Size Matters

Constantinos Syropoulos

doi:10.1111/1467-937X.t01-1-00028

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Optimum Tariffs and Retaliation Revisited: How Country Size Matters

Journal article

Peer reviewed

Optimum Tariffs and Retaliation Revisited: How Country Size Matters

Constantinos Syropoulos

The Review of economic studies, v 69(3), pp 707-727

01 Jul 2002

DOI: https://doi.org/10.1111/1467-937X.t01-1-00028

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Abstract

Elasticity of demand

Endowments

Free trade

Nash equilibrium

Price elasticity

Retaliation

Tariffs

Terms of trade

Trade policy

War

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.