Sustaining free trade in repeated games without government commitment

The paper examines how free trade can be sustained in a repeated tariff game in a simple two-country general equilibrium model. In the standard model, free trade can be sustained by "punishment strategies" with only a mild degree of forward looking behaviour on the part of governments. However, when there are short term factor market rigidities, and governments cannot precommit to an ex-ante optimal tariff, it may be much more difficult to sustain free trade. This is illustrated in two models.

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