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Tariff Wars and the Mercantilist-Nationalist Trap: A Mean Field Game of Strategic Trade and Global Finance

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  • Heng-fu Zou

Abstract

This paper develops a dynamic, multi-country model in which governments strategically set import tariffs to fund national defense, and representative agents derive utility from consumption, capital, foreign asset holdings, and publicly financed military strength. The model embeds mercantilist-nationalist preferences within a linear-quadratic-Gaussian (LQG) framework, allowing closed-form solutions for optimal consumption, savings, and trade behavior. We extend the model to a mean field game, where each government optimizes its tariff policy in response to the aggregate tariff behavior of all other countries. The equilibrium is characterized by a Hamilton-Jacobi-Bellman-Fokker-Planck system and features endogenously determined global interest rates, cross-country capital flows, and securitized trade patterns. Simulations reveal a structural mercantilist trap: globally depressed interest rates, strategic reserve ac cumulation, and persistent trade imbalances. The model explains how decentralized, rational policy behavior under sovereignty and security concerns gives rise to systemic instability and geopolitical fragmentation in today's global economic order.

Suggested Citation

  • Heng-fu Zou, 2025. "Tariff Wars and the Mercantilist-Nationalist Trap: A Mean Field Game of Strategic Trade and Global Finance," CEMA Working Papers 760, China Economics and Management Academy, Central University of Finance and Economics.
    • Handle: RePEc:cuf:wpaper:760
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    References listed on IDEAS

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