On the Best Use of Trade Controls in the Presence of Foreign Market Power

This paper derives optimum tariffs for a country whose trading partner always exploits its own market power but assumes naively that the home country will leave its restriction unchanged. It then shows that a country which is a monopolist or monopsonist will always prefer its best price limit (price floor or ceiling) to its best tariff and prefer free trade to any quota. However, a duopsonist or duopolist will prefer its best quota to its best tariff and free trade to any price limit. Finally, the best import or export tariff of a country which fears retaliation may be negative