General Equilibrium and Welfare in International Trade

Abstract

General equilibrium is investigated in the tradition of Cournot, Mill, and Marshall, as applied to countries rather than individuals, on the assumption that individual preferences can be aggregated. This includes the competitive equilibrium of free trade, as well as of restricted trade resulting from tariffs, analyzed by Marshall as well as by Johnson. Johnson’s theory of tariff wars is analyzed as an example of Cournot’s theory of duopoly, leading to a Nash equilibrium in contrast to the competitive equilibrium of free trade. Finally, the effect of unstable equilibrium is discussed as presented in recent work by Wan and Zhou, suggesting a new concept of negotiated equilibrium.

Keywords

• international trade
• tariffs
• tariff wars
• multiple equilibria
• negotiated equilibrium