COUNTRY-BASHING TARIFFS - DO BILATERAL TRADE DEFICITS MATTER

This paper investigates the impact of restricting bilateral trade imba lances in a three country, three good model. Bilateral trade balances matter because, in the Nash equilibrium, each country will impose tari ffs on countries with whom they have bilateral deficits or promote tra de with countries with whom they have bilateral surpluses. All countri es lose from a Nash country-bashing war. Each country loses from the u nilateral elimination of its bilateral imbalances, But a country can g ain from a bilateral agreement with its deficit partner provided that country has a surplus with a country devoted to free trade. (C) 1998 E lsevier Science B.V. All rights reserved.