Strategic Agricultural Trade Policy Interdependence and the Exchange Rate: A Game Theoretic Analysis

Strategic Agricultural Trade Policy Interdependence is modeled using a game theoretic framework. The model distinguishes between the European Community, the United States and a politically passive rest-of-the-world. Particular emphasis is placed on the effect of the exchange rate on the equilibrium outcome of this game. Without compensatory payments to those with the highest political influence, the results suggest that only modest reform is possible. With compensation, liberalization occurs but free trade is not obtained. Simulations also indicate that the U.S. gains incentive to reduce protection given a depreciation of the dollar, while incentive to liberalize trade policies decreases as the dollar appreciates.