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¹⁰ For examples of the large literature that violently and sometimes persuasively objects to every historical interpretation in this paragraph, see McKeown (fn. 1); Oye, Kenneth A., “The Sterling-Dollar-Franc Triangle: Monetary Diplomacy 1929–1937,” World Politics 38 (October 1985), 173–99CrossRefGoogle Scholar and Russett, Bruce, “The Mysterious Case of Vanishing Hegemony,” International Organization 39 (Spring 1985), 207–3CrossRefGoogle Scholar

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¹⁴ For a brief discussion of bribery as an alternative to tariff retaliation in the context of two states of equal size, see Conybeare (fn. 11), 14–15.

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¹⁸ In his most recent work, Conybeare notes that heavy export taxes may induce substitution that, in turn, dictates the use of lighter taxes in the interest of maximizing long-run profits. Conybeare dismisses this argument unpersuasively: he maintains that “long-term elasticity . . . arguments merely assert that the hegemon is not really a hegemon.” See Conybeare, John A. C., Trade Wars: The Theory and Practice of International Commercial Rivalry New York: Columbia University Press, 1987), 72Google Scholar.

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²² The present analysis seems to suggest that the American encouragement of what became the European Economic Community was illogical. Even without introducing security factors, however, the U.S. action can be interpreted as taking control of, rather than waiting for, the inevitable: in promoting the formation of the EEC when it did, the United States had an opportunity to exert significant leverage over the direction of the union. Thus, it could successfully demand, for example, that the EEC treat foreign direct investment as it did national investment, thus ensuring that U.S. firms would be able to circumvent EEC tariffs, albeit at some cost to those firms. See Gilpin (fn. 5).

²³ Donald McCloskey has argued that Britain lost “at most” 4% of national income when it chose free trade rather than an optimum tariff (fn. 20, p. 305). Bhagwati notes that Mc- Closkey's analysis relies on “intuition”; he observes that Douglas Irwin has estimated British foreign trade elasticities for that period and calculated the welfare loss of unilateral tariff reduction at about 0.5 percent of national income in the very short run. As Irwin points out, though, longer-run elasticities imply an extremely small welfare loss, and if foreign tariff reductions are factored in (resulting from Britain's demonstration effect promoting free trade) Irwin finds that Britain was made better off. Irwin, “Welfare Effects of British Free Trade: Debate and Evidence from the 1840s,” presented to Mid-West International Economics Meetings, Ann Arbor, Michigan, 1987, cited in Bhagwati (fn. 21), 29–30.

²⁴ Conybeare (fn. 11), 6.

²⁵ This assumes that states possess similar degrees of market power. If they do not, it is possible for one state to be better off, even after the cycle has been completed, than if it had pursued free trade. See Johnson, H. G., “Optimum Tariffs and Retaliation,” Review of Economic Studies 21 (No. 55, 1953–54), 142–53CrossRefGoogle Scholar.

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⁵¹ It is this combination that motivates the role of reputations in such games as the chainstore paradox and formal analyses of cooperation in finite PDs. See Kreps and Wilson (fn. 15); also Kreps, David M., Milgrom, Paul, Roberts, John, and Wilson, Robert, “Rational Cooperation in the Finitely Repeated Prisoners' Dilemma,” Journal of Economic Theory 27 (August 1982), 245–52CrossRefGoogle Scholar.

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⁶⁸ In theory, it is possible for states negotiating with each other to conclude an agreement that improves the absolute welfare of each while it preserves the pre-existing balance of power between them. The prerequisites of such an agreement are formidable, however: the utility functions of the states must be common knowledge, and the contracting states must agree on a utility scale that will determine both the status quo ante and the division of benefits from cooperation. (Rapoport, Anatol, Fights, Games, and Debates [Ann Arbor: University of Michigan Press, 1974], chap. 11.CrossRefGoogle Scholar) In practice, it seems unlikely that these conditions will be fulfilled.