The Dynamics of Tariff Retaliation Between the United States and Canada: Theory and Evidence

Abstract

This paper presents theory and empirical evidence showing a retaliatory pattern in US–Canadian tariff interactions in the period 1868–1970, whereby the changes in the tariff level of each country are Granger‐caused by the other. In the long run, the USA maintains the tariff changes that it initiates while the Canadian policy tends to back away from changes that it initiates. Furthermore, Canadian policy demonstrates a permanent change following US innovations, while in the long run the US tariff returns to its own internal equilibrium unaffected by innovations in the Canadian tariff.