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On the Logic of Unilateral Free Trade

In this new paper, published today by the Mercatus Center, I use simple game theory to explain core differences in the thinking of those of us who support a policy of unilateral free trade from the thinking of those who, while not hostile to free trade, oppose a policy of unilateral free trade. Here’s my conclusion:

The long-standing and still-prevalent consensus among economists is that (a) protectionist policies in all but the rarest of theoretical cases impose net damage on the home economy and (b) the bulk of the economic damage of any government’s protectionism falls on its own citizens. The logic that leads to these conclusions is depicted in figure 2. These conclusions differ substantially from conventional beliefs about trade, which are depicted in figure 1. Whereas figure 1 shows the conventional misunderstanding of the gains of trade and the consequent reasons for opposing unilateral free trade, figure 2 reveals trade unilateralists’ reasons for supporting it.

As I recognize, economists and others who support a policy of unilateral free trade do not (as is often asserted by protectionists) deny that a foreign government’s protectionism inflicts some damage in the home country. Informed trade unilateralists make no such denial. Nor do they deny the theoretical possibility that retaliatory tariffs could, in theory, cause foreign governments to reduce or even eliminate their tariffs, thus yielding net gains in the home country over the long term. But an economically informed comparison of the magnitude of the damage that foreign-government protectionism has at home with the damage done at home by home-government protectionism casts doubt on the wisdom of retaliation. This doubt is only intensified when one recognizes the interest-group pressures that realistically are almost always at the root of governments’ resort to protectionism—pressures explained well by public choice theory and repeatedly confirmed by history.