It is well known (Kemp, 1962; Samuelson, 1962; Bhagwati, forthcoming) that, for a country with no monopoly power in trade (or domestic distortions), free trade (in the sense of a policy resulting in the equalization of domestic and foreign prices and hence excluding trade, production and consumption taxes, subsidies, and quantitative restrictions) is the optimal policy. It follows, therefore, that free trade is superior to no trade.
It has also been argued recently (Kemp, 1962), that, even in the case where there is monopoly power in trade, so that both no trade and free trade are suboptimal policies, it is possible to demonstrate that free trade is superior to no trade.
What of the case where the country has no monopoly power in trade but has a non-economic objective which consists in requiring production to be maintained at a certain level in a specific activity? In the standard, two-commodity case, this type of objective can be treated as requiring production to be necessarily at a particular position on the production-possibility frontier-as has been done by earlier writers, such as Corden (1957) and Johnson (1965). Can we still rank trade as superior to autarky in this case? In the following analysis, we distinguish between two sets of possible trade policies: (1) trade with consumption at international prices and (2) trade with tariffs and (trade) subsidies.
Antitrust and Trade Regulation | Economics | Law
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Jagdish N. Bhagwati,
Non-Economic Objectives and the Efficiency Properties of Trade,
J. Pol. Econ.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/4055