The Political Economy
of Trade Policy
On November 8, 2005, the U.S. government and the government of China
signed a memorandum of understanding under which China agreed, under
U.S. pressure, to establish quotas on its exports of various types of clothing
and textiles to the United States. For example, China agreed that in 2006 it would not
ship more than 772.8 million pairs of socks to America. This agreement significantly
raised the price of socks and other goods to American consumers. While China was
willing to accommodate the United States on this point, however, it balked at U.S.
demands that it reduce its own tariffs on manufactured and agricultural goods.
Both the Chinese and the U.S. governments, then, were determined to pursue
policies that, according to the cost-benefit analysis developed in Chapter 9, produced
more costs than benefits. Clearly, government policies reflect objectives
that go beyond simple measures of cost and benefit.
In this chapter we examine some of the reasons governments either should
not or, at any rate, do not base their trade policy on economists’ cost-benefit
calculations. The examination of the forces motivating trade policy in practice
continues in Chapters 11 and 12, which discuss the characteristic trade policy
issues facing developing and advanced countries, respectively.
The first step toward understanding actual trade policies is to ask what reasons
there are for governments not to interfere with trade—that is, what is the
case for free trade? With this question answered, arguments for intervention can
be examined as challenges to the assumptions underlying the case for free trade.
LEARNING GOALS
After reading this chapter, you will be able to:
• Articulate arguments for free trade that go beyond the conventional gains
from trade.
• Evaluate national welfare arguments against free trade.
• Relate the theory and evidence behind “political economy” views of trade
policy.
• Explain how international negotiations and agreements have promoted
world trade.
• Discuss the special issues raised by preferential trade agreements.
of Trade Policy
On November 8, 2005, the U.S. government and the government of China
signed a memorandum of understanding under which China agreed, under
U.S. pressure, to establish quotas on its exports of various types of clothing
and textiles to the United States. For example, China agreed that in 2006 it would not
ship more than 772.8 million pairs of socks to America. This agreement significantly
raised the price of socks and other goods to American consumers. While China was
willing to accommodate the United States on this point, however, it balked at U.S.
demands that it reduce its own tariffs on manufactured and agricultural goods.
Both the Chinese and the U.S. governments, then, were determined to pursue
policies that, according to the cost-benefit analysis developed in Chapter 9, produced
more costs than benefits. Clearly, government policies reflect objectives
that go beyond simple measures of cost and benefit.
In this chapter we examine some of the reasons governments either should
not or, at any rate, do not base their trade policy on economists’ cost-benefit
calculations. The examination of the forces motivating trade policy in practice
continues in Chapters 11 and 12, which discuss the characteristic trade policy
issues facing developing and advanced countries, respectively.
The first step toward understanding actual trade policies is to ask what reasons
there are for governments not to interfere with trade—that is, what is the
case for free trade? With this question answered, arguments for intervention can
be examined as challenges to the assumptions underlying the case for free trade.
LEARNING GOALS
After reading this chapter, you will be able to:
• Articulate arguments for free trade that go beyond the conventional gains
from trade.
• Evaluate national welfare arguments against free trade.
• Relate the theory and evidence behind “political economy” views of trade
policy.
• Explain how international negotiations and agreements have promoted
world trade.
• Discuss the special issues raised by preferential trade agreements.
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