A Game-Theoretic Analysis of the Interaction Between Embargoes, Price Caps and Tariffs in EU-Russia Gas Trade

Geopolitical tensions have put the use of strategic trade policy instruments back on the agenda of policy makers. In this paper we investigate the interaction of the threat and use of three unilateral trade policy instruments: embargoes, import price caps and tariffs. In a game-theoretic framework with different scenarios and game variants, we show that the strategic use of the right combination of the respective trade policy instruments can be used to achieve more desirable outcomes for the players. In our setup, a credible threat of a tariff supports the successful implementation of an import price cap. While the results can be generalised, we show the concrete functioning of the interplay of these strategic trade policy instruments in a hypothetical game of resumption of natural gas sales from Russia to the EU. Following the application to this example, we derive policy suggestions to improve the EU’s position in the specific game.