Going Alone: The Case for Relaxed Reciprocity in Freeing Trade

One of the longstanding questions in international economics is how to get a country with an economy mired in import protection to one characterized by free trade. Reciprocity and unilateralism are the two most popular answers that economists propose. Unilateralism, or “going alone” with trade liberalization, is the standard policy prescription for a small country that, by definition, cannot affect the world price of the goods that it buys and sells. The economic rationale is that such a country is not likely to suffer aggregate welfare losses as it moves from a system of protection to one of liberal trade, and thus, in theory, it does not need to be “compensated” or given additional incentives to make such a policy change. On the other hand, reciprocity is the prescription for “large” countries that can affect their terms-of-trade. Because unilateral liberalization by such a country could increase the relative price of its imports and lead to a reduction in aggregate welfare, such a country requires an incentive to engage in trade liberalization. One such form of compensation is the “reciprocal” liberalization undertaken by its trading partners.