Tariff Game, The

Taxes on import, or tariffs, are a common policy used to achieve many ends from protecting domestic industries to raising revenue. Tariffs, by their nature, are a very contentious issue. They have been used as something of an economic weapon which countries wield against each other to achieve domestic economic goals or to encourage desired behaviors of foreign nations. Tariffs, like any tax, create some economic loss but tariffs are unique in that the loss is born in part by foreign producers and the domestic country may well face net economic gains by imposing a tariff. This paper considers the dynamic created by the incentives countries have to impose tariffs on one another through the use of a two-country two-good model. This paper considers the results predicted by the model over a variety of scenarios found in the real world including a large-small country relationship and a rich-poor government relationship. These results are compared to real world data to provide insight to some of the trade patterns seen globally. Finally the model results are discussed in a game-theoretic framework and strategic options are considered to provide for the socially optimal level of tariffs.