Optimal Tariffs with Geopolitical Alignment

As geopolitical tensions intensify, great powers often turn to trade policy to influence international alignment. We examine the optimal design of tariffs in a world where large countries care not only about economic welfare but also about the political allegiance of smaller states. We consider both a unipolar setting, where a single hegemon uses preferential trade agreements to attract partners, and a bipolar world, where two great powers compete for influence. In both scenarios, we derive optimal tariffs that balance terms-of-trade considerations with strategic incentives to encourage political alignment. We find that when geopolitical concerns are active, the optimal tariff exceeds the classic Mill-Bickerdike level. In a bipolar world, optimal tariffs reflect both economic and political rivalry, and may be strategic complements or substitutes. A calibration exercise using U.N. voting patterns, an estimate of the cost of buying votes in the U.N., and military spending suggests that geopolitical motives can significantly amplify protectionist pressures and that the emergence of a second great power can contribute to a retreat from globalization.