strategic trade retaliation

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Retaliation to foreign trade restrictions which is imposed mainly to deter further restrictions. If country A raises its tariffs or cuts its quotas on B's goods, B has to decide whether to retaliate. If B could assume that A would take no further action, the best reaction might be to do nothing, on the argument that while A's action was harmful, retaliation would just make matters worse. However, B may believe that this would be interpreted by A as a signal that further restrictions would not be resisted, so B may take some form of retaliatory action simply to signal to A that they should go no further.

Subjects: Economics.

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