Business

Domestic Economic Issues Affecting International Trade Policy

Domestic economic issues often affect free trade policies as countries pursue their own self-interests. Since the domestic economic interests of each country are different, finding common ground between nations can sometimes be difficult. Throughout history we see examples of the United States and other countries changing their trade policies to reflect the country’s economic interests at the time.

For example, from the 1870s to 1930s, the United States had some of the highest trade barriers in the country’s history. Then after World War II the United States rapidly pursued free trade policies. The reason the United States did this was because their economic interests changed. America was now interested in exploiting overseas trade. Many European industries, including the steel industry were essentially wiped out during the war. America could now profit greatly from exporting their goods to Europe for reconstruction.

Another way countries pursue their own domestic economic interests is through policy rents. Many trade policies, such as tariffs are profitable to governments. By removing tariffs, government lose out on the tariff revenue that they could have made.

Once we look at the many different factors that influence trade policy, it is easy to see why we do not have international free trade today. Most countries support free trade, but only when it is done on a level playing field. Using game theory, we are able to see how countries may gain or lose from their trading policies. In addition, the Heckscher-Ohlin theorem of international trade gives us insight on the domestic pressures that governments face, supporting the scarce factors of production. No one factor determines international trade policy, but all factors together contribute. Each of these factors is weighed differently, at different times, by different nation-states to determine their international trade policies.

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Robert Wensley

Robert Wensley is currently pursuing his bachelor’s degree in Economics with a citation in Strategic Management from Harvard University.

2 Comments

  1. What do we do now about the policies? Is there no organization out there that can push a win-win international trade policy?

  2. What did the Brits think of the USA exporting goods for reconstruction after WWII? That must have gone down well. My grandpa used to laugh about being called “oversexed, overpaid, over here” when he was stationed in the UK. He said back to them: “underpaid, undersexed & under Eisenhower.” I think the two countries were good to each other during the war but it must have caused some upset that the USA would then profit from the destruction in a way that the Brits couldn’t.

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