DYNAMIC TRADE WARS

The trade war between two countries, first studied by Johnson, is analyzed here as an alternative move game as has been done by Maskin and Tirole [1987] for oligopoly. We show that there exists a unique stable steady state when the countries use linear strategies, The common steady state value of the tariff equals its value at the static Nash equilibrium when the discount factor is zeroand is a strictly increasing function of this discount factor.