Tariffs and Pareto optimality in international trade: The case of unemployment

This paper constructs a non-Walrasian two-country model of international trade, and investigates the possibility of policy combinations including tariffs which lead to Pareto superior trades. While such policies clearly do not exist in the Walrasian full employment situation, the paper shows that there may exist some in the case of unemployment. These policies are studied in various unemployment regimes, and it is shown that their effects depend both on the regime the economy is in, and on the degree of wage indexation.