Non-Economic Objectives and the Efficiency Properties of Trade

Bhagwati, Jagdish N.

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. We can then conclude with the following propositions: 1. In the case where the desired production bundle can be reached by the use of a trade tariff, rather than a trade subsidy, autarky will still be an inferior policy, thus enabling us to rank in descending order the following three policies: (a) trade (and consumption at international prices), (b) trade tariff, and (c) no trade or autarky. 2. Where the desired production bundle must be reached by the use of a trade subsidy, on the other hand, this strong ordering of policies will disappear, while trade (and consumption at international prices) continues naturally to be the optimal policy.



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Journal of Political Economy

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February 7, 2013