The Structure of Optimal Tariff Rates under Retaliation

Abstract

This paper examines theoretically the structure of optimal (Nash equilibrium) tariff rates under retaliation in a two-country economy with more than two traded goods. We provide a condition under which the equilibrium tariff rates become uniform in both countries, and explore the ranking of the equilibrium tariff rates in each country when the uniform tariff condition is not satisfied. The elasticities of compensated excess demands for goods play an important role in determining the ranking of the equilibrium tariff rates. This paper undertakes the analysis using a dual approach.