“Nash-in-Nash” tariff bargaining

We provide an equilibrium analysis of the efficiency properties of simultaneous bilateral tariff negotiations in a three-country model of international trade. We consider the setting in which discriminatory tariffs are allowed, and we utilize the “Nash-in-Nash” solution concept of Horn and Wolinsky (1988). We allow for a general family of political-economic country welfare functions and assess efficiency relative to these welfare functions. We establish a sense in which the resulting tariffs are inefficient and too low, so that excessive liberalization occurs from the perspective of the three countries.