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Threats Or Promises? A Built-In Mechanism Of Gradual Reciprocal Trade Liberalization

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  • TAIJI FURUSAWA
  • TAKASHI KAMIHIGASHI

Abstract

We analyze an infinitely repeated tariff-setting game played by two large countries with alternating moves. We focus on the subgame perfect equilibria in which each country chooses its tariff according to a stationary function of the other country's tariff. We show that there are many equilibria with two steady states, one with higher tariffs (but still lower than the static Nash tariffs), the other with lower tariffs. We also show that there is a special class of equilibria in which there exists a unique, globally stable steady state. In both types of equilibria, one country unilaterally reduces its tariff from the static Nash equilibrium, the other country reciprocates in response to the first country's implicit "promise" to lower its tariff even further, and this process continues forever, converging to a steady state with tariffs lower than the static Nash tariffs. Therefore, promises, rather than threats, induce countries to gradually reduce their tariffs.
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Suggested Citation

  • Taiji Furusawa & Takashi Kamihigashi, 2012. "Threats Or Promises? A Built-In Mechanism Of Gradual Reciprocal Trade Liberalization," The Japanese Economic Review, Japanese Economic Association, vol. 63(2), pages 259-279, June.
    • Handle: RePEc:bla:jecrev:v:63:y:2012:i:2:p:259-279
    DOI: j.1468-5876.2012.00567.x
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    Cited by:

    1. Germán H. GONZALEZ & Alexis S. ESPOSTO & Valentina N. VIEGO, 2015. "Reciprocity in bilateral trade flows: An empirical analysis for trade between Australia and Latin American countries," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 15(1), pages 31-44.
    2. Hiroshi Daisaka & Taiji Furusawa, 2014. "Dynamic Free Trade Networks: Some Numerical Results," Review of International Economics, Wiley Blackwell, vol. 22(3), pages 469-487, August.

    More about this item

    JEL classification:

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

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