What happens when two countries apply tariffs against each other in an attempt to capture their terms-of-trade gain?
a. Both countries lose because the terms-of-trade gain for one country is canceled by the tariff in the other country.
b. Both countries gain because the terms-of-trade gain for one country is canceled by the tariff in the other country.
c. Neither country gains nor loses because the terms-of-trade gain for one country is canceled by the tariff in the other country.
d. The country initially applying the tariff gains because it captures the terms-of-trade gain; the other country neither gains nor loses.
Ans: a. Both countries lose because the terms-of-trade gain for one country is canceled by the tariff in the other country.
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