Barriers to trade

Here is the theory behind modern trade agreements as I understand it.

At its best, the purpose of a trade agreement is to remove barriers to trade.

When two people engage in trade, with full information and rationality, this can only result in mutual benefits. But nations are not individual people, so it gets much more complicated. By imposing a barrier, such as a tariff, a country might be able to get a higher price for its exports, overall, than it would otherwise get -- improve its "terms of trade," exploit monopoly power -- and benefit at the expense of the other country. But the other country can do the same with products in which it has some monopoly power. Thus "both countries are worse off." By agreeing to eliminate the barriers to trade, "both countries can be better off."

However, tariffs are not the only "barriers to trade." Quotas have been pretty common. Today, however, with a few key exceptions (often in agriculture) tariffs and quotas are generally minor.

On the other hand, regulations of many other kinds can be "barriers to trade." Quality regulations, for example -- a government may decide that its citizens need to be protected from rice of inferior quality (which happens to be grown in Texas) and establish quality standards just such that the imported rice cannot meet them. Thus a modern trade agreement needs a mechanism by which these disguised trade-monopoly regulations can be relaxed. That's what makes it so doggone complicated, see.

This theory fails in several ways. Here are two important ones:

First, regulations on quality, standards, and intellectual property often reflect cost-benefit calculations that include domestic costs and benefits as well as the costs and benefits derived from international trade. (Example: lower intellectual property protection makes it more likely that the poor will get the drugs they need.) Thus, focusing only on their effect as barriers to trade essentially guarantees that the elimination of the regulations will often make the country that eliminates them worse off, overall, even if they benefit greatly from increased trade (which of course is not guaranteed.) The powerful will ignore these measures, and the weak, eventually, will rebel against them -- or worse.

Second, free traders will often point out that trade barriers don't really benefit the country but rather those who are politically powerful within the country. And on that, the free-traders are right. But the same argument works the other way. The beneficiaries of the selective elimination of "barriers to trade" (including regulations adopted for reasons other than their effect on trade) will be those who are politically powerful within the country. The only way to benefit those who are not politically powerful within the country is to change the balance of power within the country.