By Alan Verne Deardorff, Robert Mitchell Stern
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Extra resources for Constituent Interests and U.S. Trade Policies (Studies in International Economics)
Trade policies, because they distort prices faced by both producers and consumers, are almost always suboptimal and often welfare worsening. As we suggested some years ago in Deardorff and Stern (1987), use of trade policy is like "doing acupuncture with a fork" since no matter how well you aim the first prong (distortion), the other will cause unwanted damage. The one exception is the terms of trade argument for a large country, where the failure of individual producers and consumers to internalize their country's effect on the terms of trade distorts both of their decisions equally.
In considering the economic issues involved, Srinivasan shows formally that diversity in labor standards is legitimate and consistent with the case to be made for gainful trade based on comparative advantage. It is granted that there may be situations in which low labor standards can be considered as a market failure, and, if so, the optimal policy is some domestic taxlsubsidy arrangement rather than trade policy. Srinivasan is especially critical of a proposal by Dani Rodrik and empirical work by Alan Krueger that seek to establish a rationale for using trade policy to enforce labor standards.
Trade Policies Why is international trade not free? The models explain why governments intervene in the economy, which is in order to alter the distribution of income in favor of certain interests. But they do not explain why intervention in trade is the tool used for this purpose, except by assuming that it is the only tool available. We know from the normative approach to trade policy that trade intervention is not first best for this purpose, and optimizing governments andlor industry interests could therefore gain more of whatever they are seeking by using other policies.