Who Wins a Trade War? Mark Melatos, Pascalis Raimondos-Møller and Matthew Gibson August 31, 2007 Abstract. A trade war provides an economic rationale for the existence of barriers to trade. The main result in this literature is that “big countries win trade wars.” This pa- per extends this result by considering a wider range of factors that determine the outcomes of trade wars. In a purely non-cooperative two-country Heckscher-Ohlin model of trade, the country size result is confirmed. However, a country whose pref- erences exhibit a sufficiently large degree of substitutability relative to those of its rival may win a trade war regardless of its size. In particular we demonstrate that a small country can win a trade war against a larger rival if its preferences exhibit sufficient substitutability. Separately, we also demonstrate that the more similar the relative factor endowments of two countries, the smaller the welfare gains or losses from a trade war will be to each. PRELIMINARY VERSION - PLEASE DO NOT QUOTE Acknowledgement: Melatos gratefully acknowledges the financial support of an Australian Research Council research grant. Melatos and Gibson: Discipline of Economics, Faculty of Economics and Busi- ness, University of Sydney Australia. Raimondos-Møller: Department of Economics, Copenhagen Business School, Denmark. Keywords: Trade Wars, Optimal Tariffs JEL Classification Codes: F13 Address of Contact Author: Mark Melatos: Economics, Faculty of Economics and Business, University of Sydney, Sydney, N.S.W. 2006, Australia. Tel: 61 (2) 9036- 9257, Fax: 9351-4341, Email: m.melatos@econ.usyd.edu.au 1