Who Wins a Trade War?

Mark Melatos, Pascalis Raimondos-Møller and Matthew Gibson

August 31, 2007

Abstract
A trade war provides an economic rationale for the existence of barriers to trade. The main result in this literature is that “big countries win trade wars.” This paper extends this result by considering a wider range of factors that determine the outcomes of trade wars. In a purely non-cooperative two-country Heckscher-Ohlin model of trade, the country size result is confirmed. However, a country whose preferences exhibit a sufficiently large degree of substitutability relative to those of its rival may win a trade war regardless of its size. In particular we demonstrate that a small country can win a trade war against a larger rival if its preferences exhibit sufficient substitutability. Separately, we also demonstrate that the more similar the relative factor endowments of two countries, the smaller the welfare gains or losses from a trade war will be to each.