The Protection-as-a-Bargaining

Another argument for trade restrictions concerns the strategy of bargaining. Many policymakers claim to support free but at the same time argue that trade restrictions can be useful when we bargain with our trading partners. They claim that the threat of a trade restriction can help remove a trade restriction already imposed by a foreign government. For example Isoland might threaten to impose a tariff on steel unless Neighborland removes its tariff on wheat. If Neighborland responds to this threat by removing its tariff the result can be free trade.

The problem with this bargaining strategy that the threat may not work. It doesn’t work the country has a difficult choice. It can carry out its threat and implement the trade restriction which would reduce its own economic welfare. Or it can back down from its threat which would cause it to lose prestige in international affairs. Faced with this choice the country would probably wish that it had never made the threat in the first place.

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