Country-bashing tariffs: Do bilateral trade deficits matter?

Abstract

This paper investigates the impact of restricting bilateral trade imbalances in a three country, three good model. Bilateral trade balances matter because, in the Nash equilibrium, each country will impose tariffs on countries with whom they have bilateral deficits or promote trade with countries with whom they have bilateral surpluses. All countries lose from a Nash country-bashing war. Each country loses from the unilateral elimination of its bilateral imbalances. But a country can gain from a bilateral agreement with its deficit partner provided that country has a surplus with a country devoted to free trade.