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Comparative advantage and optimal trade policy with strategic interactions

Author

Listed:
  • Dai, Mengmeng
  • Hsu, Wen-Tai
  • Jin, Wei
  • Wang, Yongjin
  • Yang, Siqiang

Abstract

This paper introduces strategic interactions into a Ricardian model where two countries optimize trade policies. In a Nash Equilibrium, we find that optimal import tariffs are zero, while export taxes rise with comparative advantage, aligning with but extending the unilateral model of Costinot et al. (2015) by allowing both countries to act strategically. Our analysis reveals that welfare gains from trade policy diminish when both countries pursue optimal policies. Surprisingly, a smaller country can benefit from Nash Equilibrium through higher export taxes in goods with technological advantages. Applying the model to agriculture, we assess welfare under autarky, free trade, Nash Equilibrium, and unilateral policy, showing that small, competitive nations can outperform free trade through strategic policy, providing insights into optimal trade policy across goods.

Suggested Citation

  • Dai, Mengmeng & Hsu, Wen-Tai & Jin, Wei & Wang, Yongjin & Yang, Siqiang, 2026. "Comparative advantage and optimal trade policy with strategic interactions," International Journal of Industrial Organization, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:indorg:v:104:y:2026:i:c:s016771872500102x
    DOI: 10.1016/j.ijindorg.2025.103236
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    Keywords

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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade

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