Working Paper: NBER ID: w1588
Authors: Robert E. Baldwin; Richard N. Clarke
Abstract: Using actual trade and tariff data for the United States and the European Community, this paper demonstrates how a trade negotiation such as the Tokyo Round, can be modelled as a game among countries attempting to minimize individual welfare loss functions. Once welfare functions are constructed, we compute both noncooperative and cooperative Nash equilibria. These welfare outcomes are then compared with those arising from the initial tariff structure, as well as the structure actually determined by the negotiation. We find that while the game model may track closely the decisions of the negotiators in the Tokyo Round, later unilateral political decisions resulted in less "optimal" tariffs.
Keywords: Tariff negotiations; Game theory; Welfare functions; Nash equilibria
JEL Codes: F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Nash equilibria solutions (C72) | lower overall welfare losses for U.S. and EC (D69) |
| negotiation process (C78) | welfare outcomes (I38) |
| actual tariff cuts (F13) | inferior welfare terms compared to Nash equilibria (D69) |
| political compromises (D72) | suboptimal tariffs (F13) |