Abstract
When trade occurs, whether it’s between individuals or countries, the presumption is that both sides of the deal benefit. This leads to the idea of “free trade” in which the open market maximizes welfare. The efficiency of trade, however, rests on two key assumptions. First, there should be no externalities, that is, only those involved in the decision are affected. Second, there should be no uncertainty surrounding the transaction or its effects. Unfortunately, with international trade, both of these assumptions fail as global supply chains mask the impacts of trade on workers, consumers, and the environment. This then creates a role for regulatory trade policy which, although second best, can be the most feasible way of addressing the negative effects of trade.
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Notes
- 1.
It is worth noting, however, that trade in military weapons remains legal. In 2020, the US led the world in weapons trade, exporting over $175 billion worth.
- 2.
For the US, you can find a list of fees at U.S. Customs and Border Protection (2022).
- 3.
Another example of an outright ban is an embargo, that is, when a government tries to shut down all trade with a single country (as opposed to shutting down all trade in a single good). This is typically done to achieve political goals rather than correct externalities or address imperfect information.
- 4.
When a country subsidizes its farm production, this gives its farmers a cost advantage relative to foreign producers. Since this will tend to boost the subsidized farmers' exports and lower imports, this seemingly domestic policy can have sizable trade effects. Indeed, conflict about agricultural subsidies between the developed and developing countries is a major impediment in World Trade Organization discussions.
- 5.
Note that this is a discussion of wages, not jobs. Even though there was a large influx of Chinese imports into the US which resulted in somewhere around 1.5 million job losses in US manufacturing (Autor and Dorn 2013), there is no clear evidence of a net effect in US jobs since those displaced workers tended to switch to service jobs (Bloom et al. 2019).
- 6.
Gaston and Trefler (1994) among many others provide evidence of the effectiveness of government intervention in addressing the wage effects of import competition.
- 7.
See Davies and Naughton (2014) for evidence of this in environmental treaty participation.
- 8.
See Cole and Davies (2014) for a detailed discussion.
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Davies, R.B. (2023). The Case for Regulated Trade. In: Kassens, A.L., Hall, J.C. (eds) Challenges in Classical Liberalism. Palgrave Studies in Classical Liberalism. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-32890-9_7
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