Welfare Improving Prohibitive Tariffs

We consider welfare impacts of prohibitive tariffs on trading partners. Initially, there is prohibitive tariff by one country and a zero tariff by its trading partner. Thereafter, the trading partner also resorts to prohibitive tariff. We demonstrate how prohibitive tariffs by the trading partners can unambiguously increase welfare for both the countries through international transfer of technology. The critical and novel proposition of the paper is that the country targeted for retaliation with a prohibitive tariff would welcome such a move for welfare reasons.