Temporary Tariffs and Capital Market Restrictions

We develop a two-period model with endogenous investment and credit flows. Credit is subject to quantitative restrictions. With an exogenous restriction, we analyze the welfare effects of temporary tariffs. We then consider three scenarios under which a monopoly lender optimally decides the level of credit and a borrower country chooses an import tariff: one in which the two parties act simultaneously and two scenarios where one of them has a first-mover advantage. The equilibrium under the leadership by the borrower country is Pareto superior to the Nash equilibrium and can also be to that under the leadership by the lender.