What does Buddhism say about pragmatic retribution? I'd really like to buy into the ideas of understanding and patience even for those who hurt us. However my concern is that sometimes failing to engage in the tit-for-tat teaches that there are no consequences. Two different examples:

1) If a diplomat is expelled, should the other side expel also?

2) In a post divorce situation, if one side initiates legal action should the other side withhold previously allowed concessions? 

It's not clear to me how one can avoid engaging in retribution in some cases.
There are countless examples of non-retaliation being depicted as admirable.

One that comes to mind is this one: Is That So?

Not that you'll necessarily find the mere fact that it's "admirable" is necessarily a good or sufficient reason -- instead a good reason includes to minimize suffering, allow the cessation of suffering, of those involved.

I don't want to answer the part of the question about diplomats (that seems to me a matter of politics rather than Buddhism).

"Pragmatic retribution" is what I'd call, Tit for tat. It's a popular game (or model, strategy, game theory), but simplistic to the point of stupidity, and I think not Buddhist.

On the subject of divorce, I'd suggest (from experience) that maybe both parties in a divorce should have legal counsel, and perhaps avoid making agreements and concessions without legal counsel (or at least, I think that's the way it works in "my country"). That's not a matter of retribution though, it's a matter of being equitable and finding a division (a "separation agreement") that's fair or as beneficial as possible to both parties.

Also I'm not sure that I agree with the premise of "understanding those who hurt us". Apparently there's a proverb that "to understand is to forgive", but maybe Buddhism has a different take on that subject. I'm thinking of the opening lines of the Dhammapada:


  
  Mind precedes all mental states. Mind is their chief; they are all mind-wrought. If with an impure mind a person speaks or acts suffering follows him like the wheel that follows the foot of the ox.
  Mind precedes all mental states. Mind is their chief; they are all mind-wrought. If with a pure mind a person speaks or acts happiness follows him like his never-departing shadow.
  "He abused me, he struck me, he overpowered me, he robbed me." Those who harbor such thoughts do not still their hatred.
  "He abused me, he struck me, he overpowered me, he robbed me." Those who do not harbor such thoughts still their hatred.
  Hatred is never appeased by hatred in this world. By non-hatred alone is hatred appeased. This is a law eternal.
  There are those who do not realize that one day we all must die. But those who do realize this settle their quarrels.
  


The first line is about intention: your intention matters (for example whether you intend to hurt someone, or don't intend to hurt someone).

The third verse seems relevant though. Rather than "understanding those who hurt us" maybe it's better to understand (i.e. maybe "Buddhism would recommend" that you understand) yourself (or the things which you take to be yourself): how and why you're "hurt", what the nature of that hurt is, maybe what "views" you might change (or "abandon") to not be hurt in future. Maybe hurt can be caused by attachment (to something impermanent); considering something (or someone) as "yours"; hurt "pride"; and so on.

I recommend the truth of the sixth verse to you.

It's not clear to me how one can avoid engaging in retribution in some cases.

That's one of the reasons to have a lawyer each, or a mediator in common (or even two lawyers and a mediator). They can be a bit more dispassionate, professional, in dealing with the other party (and you can be more professional when you're dealing with them).