Bilateral Tariffs Under International Competition

Document pages: 16 pages

Abstract: This paper explores the gain maximization problem of two nations engaging innon-cooperative bilateral trade. Probabilistic model of an exchange ofcommodities under different price systems is considered. Volume of commoditiesexchanged determines the demand each nation has over the counter party scurrency. However, each nation can manipulate this quantity by imposing atariff on imported commodities. As long as the gain from trade is determined bythe balance between imported and exported commodities, such a scenario resultsin a two party game where Nash equilibrium tariffs are determined for variousforeign currency demand functions and ultimately, the exchange rate based onoptimal tariffs is obtained.