Market Integration and Tariff Cooperation between Asymmetric Countries

Abstract

This paper explores the relationship between market integration --- specifically a reduction in trade costs --- and the sustainability of tariff cooperation with infinitely repeated game approach. We demonstrate the property of non-cooperative and cooperative tariff about the trade costs and the size of domestic industry. As a result on the tariff determined by the governments, the market integration doesn't induce the tariff rates to be lowered bilaterally under the non-cooperative policy regime. Also, the analysis in repeated game framework demonstrates that the market integration facilitates the cooperation between asymmetric countries, which achieves the bilateral trade liberalization.