Tari¤Wars in the Ricardian Model with a Continuum of Goods

This paper derives the optimum tari ¤ rate policy within the Ricardian framework of Dornbusch-Fischer-Samuelson (1977) and analyzes the comparative statics of the associ-ated Nash equilibrium. First, it is established that the optimum tari ¤ schedule involves a uniform tari ¤ rate (across goods) which is inversely related to the import demand elasticity of the other country. The impact of absolute productivity advantage and the size of the la-bor force on this tari ¤ rate are shown to be equivalent such that a single measure of relative e¤ective size summarizes their joint e¤ect. Using this measure, I show that a su ¢ ciently large economy will prefer the ine ¢ cient Nash equilibrium outcome over Free Trade due to its quasi-monopolistic power on world markets. The static Nash equilibrium analysis is shown to be directly relevant within the framework of a dynamic game which can be used to characterize self-enforcing trade agreements