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Trade Retaliation in a Monetary-Trade Model

Author

Listed:
  • Whalley John

    () (University of Western Ontario)

  • Yu Jun

    () (Bosera Asset Management Co., Ltd.)

  • Zhang Shunming

    () (Renmin University of China)

Abstract

We explore how outcomes of trade policy retaliation (Nash tariff games) are affected when trade simultaneously takes places geographically across countries and through time via financial intermediation. In such models, deficits and surpluses in goods trade are endogenously determined, and retaliatory trade policy towards goods can affect these and monetary trade models show different retaliatory trade outcomes from conventional goods only models. We use a general equilibrium goods trade model, which also captures trade through time in the form of inside money as used in macro literature on one good overlapping generations models. In this model, the deficit or surplus of any country in goods trade is endogenous determined. Optimal trade policy differs from that in a conventional goods only trade model in that countries which run trade deficits in goods will have more strategic power through tariff policy (and surplus countries less) than in models with balanced trade. We calibrate such a model to China's trade with the rest of the world and explore two country tariff games using 2005 data. Results show the significant impacts on Nash outcomes of endogenizing the Chinese trade surplus in the model in this way.

Suggested Citation

  • Whalley John & Yu Jun & Zhang Shunming, 2012. "Trade Retaliation in a Monetary-Trade Model," Global Economy Journal, De Gruyter, vol. 12(1), pages 1-29, March.
  • Handle: RePEc:bpj:glecon:v:12:y:2012:i:1:n:2
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    References listed on IDEAS

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    1. W. M. Gorman, 1958. "Tariffs, Retaliation, and the Elasticity of Demand for Imports," Review of Economic Studies, Oxford University Press, vol. 25(3), pages 133-162.
    2. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 769-797, August.
    3. Hamilton, Bob & Whalley, John, 1983. "Optimal tariff calculations in alternative trade models and some possible implications for current world trading arrangements," Journal of International Economics, Elsevier, pages 323-348.
    4. Kuga, Kiyoshi, 1973. "Tariff retaliation and policy equilibrium," Journal of International Economics, Elsevier, pages 351-366.
    5. Lisandro Abrego & Raymond Riezman & John Whalley, 2001. "How Reasonable Are Assumptions Used in Theoretical Models?: Computational Evidence on the Likelihood of Trade Pattern Changes," NBER Working Papers 8169, National Bureau of Economic Research, Inc.
    6. G. C. Archibald & R. G. Lipsey, 1958. "Monetary and Value Theory: A Critique of Lange and Patinkin," Review of Economic Studies, Oxford University Press, vol. 26(1), pages 1-22.
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    Citations

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    Cited by:

    1. Chunding Li, 2017. "How Would Bilateral Trade Retaliation Affect China?," Computational Economics, Springer;Society for Computational Economics, vol. 49(3), pages 459-479, March.
    2. Chunding Li & John Whalley, 2012. "Indirect Tax Initiatives and Global Rebalancing," NBER Working Papers 17919, National Bureau of Economic Research, Inc.
    3. Yan Dong & John Whalley, 2011. "Optimal tariff calculations in tariff games with climate change considerations," Applied Economics Letters, Taylor & Francis Journals, vol. 18(15), pages 1431-1435.
    4. Chunding Li & Jing Wang & John Whalley, 2014. "Numerical General Equilibrium Analysis of China's Impacts from Possible Mega Trade Deals," NBER Working Papers 20425, National Bureau of Economic Research, Inc.
    5. Chunding Li & John Whalley, 2016. "The 2008 Financial Crisis and the Lack of Retaliatory Trade Intervention," NBER Working Papers 21853, National Bureau of Economic Research, Inc.
    6. Chunding Li & John Whalley, 2012. "China and the TPP: A Numerical Simulation Assessment of the Effects Involved," NBER Working Papers 18090, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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