Question 1

The standard strategic trade policy story treats protectionism between countries as a Prisoner's dilemma. In the case of two similar sized economies with similar reliances on trade, this treatment seems reasonable. In the case of two dissimilarly sized economies, this treatment may not be entirely accurate...or at least, the two counties are not similarly disadvantaged by a trade war.

The United States' economy is roughly twenty times as large as the Canadian economy, in terms of Gross Domestic Product (GDP). Consider that the United States and Canada are considering whether to impose tariffs on each other's exports. The resulting payoffs from each possible outcome (relative to the "no tariffs" baseline) are given as: ?

• If both countries impose a tariff, Canada receives a payoff of -$50 billion, and the United States receives a payoff of -$5 billion
• If the United States imposes a tariff, but Canada does not impose a tariff, Canada receives a payoff of -$45 billion, and the United States receives a payoff of $40 billion
• If Canada imposes a tariff, but the United States does not impose a tariff, Canada receives a payoff of -$5 billion, and the United States receives a payoff of -$10 billion.
• If neither country imposes a tariff, the payoff to both countries is $0.

Part (i): Complete the normal form game below using the payoffs information described above.

Canada Impose Tariff Don't Impose Tariff Can Can! Impose Tariff US: LS: United States Can: Don't Impose Tariff USGermany Close Horder Don't Close Border G: E60 billion 6 E20 billion Border Close F: #50 billion F: #190 billion France G: 4270 billion 6 6200 billion Don't Close Border F EQ billion F: 0760 tallicanItaly Impose lariff Don't Impose lariff I: 63 billion I. so billion Impose Tariff S: E2 billion S: eg bullion Spain I: Elo billion 1 47 billion Tariff Don't Impose 5: E1 billion S: C tallionSupply Demand