An elementary model of export tax war

In this paper, the author uses a generalized version of Kennan and Riezman (Int Econ Rev 29(1):81–85, 1988) trade war model with Stone–Geary preferences, where countries can choose between a Nash tariff or an export tax. Three scenarios emerge from this setting, namely: the standard tariff war, the export tax war and a mixed scenario—“the tariff-export tax war”—where one country applies a Nash tariff, while the other imposes an export tax. In this setting, countries derive their market power not only from their relative endowment size, but also from their subsistence consumptions. As a consequence, a large country does not necessarily win a trade war if it has a substantially higher consumption requirement than the small country. This finding explains why large economies sign trade agreements with small counterparts that prohibit the use of tariffs and export taxes.