The theory of trade policy and trade agreements: A critique

During the past half century multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of trade policy, based solely on terms-of-trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. This paper uses a simple version of the Grossman-Helpman Protection-for-Sale Model (a central example of the Received Theory) to examine the consistency of the implications of this theory with actual trade policy. The conclusion is that the theory is dramatically inconsistent with reality. Furthermore, terms-of-trade externalities - the central component of the Received Theory - are the sole cause of this inconsistency. Empirical work seeming to confirm the Protection-for-Sale model actually does not do that, but instead offers support for a generic political-economy view of trade policy.