THE DETERMINANTS OF TRADE

Consider the market for steel. The steel market’s is well suited to examining the gains and losses from international trade: Steel is made in many countries around the world and there is much world trade in steel. Moreover the steel market is one in which policymakers often consider and sometimes implement trade restrictions to protect domestic steel producers from foreign competitors. We examine here the steel market in the imaginary country of Isoland.

The Equilibrium without Trade

As our story begins the Isolandian steel is isolated from the rest of the world. By government decree no one in Isoland is allowed to import or export steel and the penalty for violating the decree is so large that one dares try.

Because there is no international trade the market for steel in Isoland consists solely of Isolandian buyers and sellers. As the domestic price adjusts to balance the quantity supplied by domestic sellers and the quantity demanded by domestic buyers. The figure shows the consumer and producer surplus in the equilibrium without trade. The sum of consumer and producer surplus measures the total benefit that buyers and sellers receive from the steel market.

Now suppose that in an election upset Isoland elects a new president. The president campaigned on a platform of change and promised the voters bold new ideas. Her first act is to assemble a team of economists to evaluate Isolandian trade policy.

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