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Optimim Tariffs and Retaliation: How Country Numbers Matter

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Working paper
Author/s: 
Ben Zissimos
Issue number: 
09-W04
Publisher: 
Vanderbilt University
Year: 
2009
This paper identi es a new terms-of-trade externality that is exercised through tari setting. A North-South model of international trade is introduced in which the number of countries in each region can be var- ied. As the number of countries in one region is increased, each government there competes more aggressively with the others in its region, by lowering its tari , to attract imports from the other region. In doing so, all countries in a region exert a negative terms-of-trade externality on each other, collec- tively undermining their own terms of trade and welfare. This externality can increase e ciency if the numbers of countries in both regions are increased simultaneously.
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