The Progressive Tariff Reduction Scheme

As economists have known since Adam Smith, free trade should benefit all nations by allowing them to take advantage of gains from specialization.1 Indeed, the benefits of trade are supposed to justify unilateral liberalization: as the late British economist Joan Robinson once remarked, if your trading partner throws rocks into his harbor, that is no reason to throw rocks into your own. While unilateral liberalization has occurred in many countries to varying degrees, it has obviously not led to global free trade. Rich countries apply an average tariff of 5.2%, and poor countries apply an average tariff of 14%.2 Some countries choose to protect important industries as an integral part of their development strategy.3 For other countries, even if liberalization were to make the country better off as a whole – in the sense that there are more winners than losers in the long run and the winners could, in principle, compensate the losers – it may still be politically unfeasible, if those losers have political power and cannot be effectively compensated. (Part of the problem is making a credible commitment to compensate in the future.) The persistence of protection suggests that, in most countries, political leaders continue to find that the balance of economic and political-economy considerations falls in favor of protection.