Game-modeling multilateral trade negotiations

Using actual trade and tariff data for the United States and the European Community, this paper demonstrates how a trade negotiation such as the Tokyo Round can be modeled as a game among countries attempting to minimize individual welfare loss functions. First, we construct welfare functions based on suggested trade negotiation goals. We compute both the noncooperative Nash-Cournot equilibrium tariffs and the cooperative Nash equilibrium implied by these welfare functions. Welfare outcomes under the computed equilibrium tariffs are then compared with those arising from the initial tariff structure, as well as the tariff structure actually determined by the negotiation. We find that, while the game model tracks closely the decisions of the negotiators in the Tokyo Round, later unilateral political decisions resulted in less optimal tariffs.