A robust analysis of trade policy

What is it about?

While optimal tariff calculations can show the possibility for large nations to increase national income via protectionist policies, they do not tell the whole story. I extend the robust political economy literature to analyze the impact of tariffs on the entrepreneurial market process. I propose that the unintended consequences of using trade policy to bolster a nation's economy will inevitably prevent an economy from allocating its resources to their highest-valued use. Even if a government manages to improve the terms of trade or protect an industry, epistemic and incentive problems prevent an efficient allocation of resources. First, government intervention void of economic calculation faces knowledge problems that inhibit and alter the course of entrepreneurial discovery distorting the market's allocation of scarce resources. Second, the incentives of market participants are changed, discoordinating market and government systems. Negative unintended consequences follow, such as rising input costs, increasing substitution for the protected good, and proliferation of lobbying. Derailed discovery and unintended consequences force decision-makers to expand or repeal the interventionist policy. I illustrate the theory with two historical trade wars: The Chicken War, 1963, and the US-Canada softwood lumber disputes, 1982-Present.

Featured Image

Photo by Cristina Gottardi on Unsplash

Photo by Cristina Gottardi on Unsplash