Japanese officials are considering a new tariff on imported pork products from t

Question

Japanese officials are considering a new tariff on imported pork products from the USA in an attempt to reduce Japan's reliance on U.S. pork.Due to political pressure, the U.S. International Trade Representative's (ITR) office is also considering a new tariff on imported steel from Japan.Officials in both Japan and the U.S. must assess the social welfare ramification of their tariff decisions.Reports from a reliable think-tank indicate the following: if neither country imposes a new tariff,social welfare in Japan's economy will remain at $4.8 billion and social welfare in the U.S. will remain at $44 billion.If both countries impose a new tariff,welfare in the U.S. declines 0.5 percent to $43.78 billion and welfare in Japan declines by 0.8 percent to $4.76 billion.If Japan does not impose a tariff but the U.S. does,projected welfare in Japan is $4.66 billion while welfare in the U.S. is $ 44.2 billion.Finally, if the U.S. does not impose a tariff but Japan does, welfare is projected at $43.66 billion in the U.S. and $4.85 billion in Japan.Determine the Nash equilibrium outcome when policy makers in the two countries simultaneously but independently make tariff decisions in a myopic(one-shot) setting.Is it possible for the countries to improve their social welfare by "agreeing" to different strategies.Explain.

Explanation / Answer

In the one-shot deal, let's think about each player's best response. For the US, first. If Japan does no tariff: US gets $44b without tariff, or $ 44.2b with tariff. US would prefer to do a tariff. If Japan does a tariff: US gets $43.66b without tariff, or $43.78b with. US would prefer to do a tariff. No matter what Japan chooses, the US would prefer to do a tariff. For Japan, next. If US does no tariff: Japan gets $4.8b without tariff, or $4.85b with tariff. Japan would prefer to do a tariff. If the US does a tariff: Japan gets $4.66b without a tariff, or $4.76b with a tariff. Japan would prefer to do a tariff. No matter what US chooses, Japan would prefer to do a tariff. So we have a clear prediction: both countries would individually choose to do a tariff. That's the Nash equilibrium in the one-shot game. This is actually the worst possible outcome overall (US welfare: 43.78; Japan: 4.76). If the two countries could agree to a "no-tariff" policy, then they could have welfare of 44b and 4.8b. Clearly, it would be possible to improve their welfare if they could agree to this.

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