The Trading Nation’s Dilemma : The Functions of the Law of International Trade

The public law of international trade acts to restrain national governments from interfering in private trade transactions. It is based upon treaties and other international agreements made, administered and enforced by the national governments to which it applies. Why do governments agree to limit their freedom of action by rules of law? This article presents a fresh explanation of the underlying functions of the international trade law regime, using a simple game theory framework to organize the analysis. This article argues that the law of international trade functions to help the governments of trading nations reach a satisfactory resolution of a complex dilemma. In the context of domestic decision-making, public officials deciding whether to grant protection to import-competing industries are faced with an unpleasant trade-off. There are short-run political gains for granting protection, with corresponding losses for refusing. However, granting protection may conflict with principles or values connected with the national interest or the interests of consumers. On the international level, trading nation governments find themselves in a situation akin to the two-player game theory scenario known as the Prisoners' Dilemma. When each player in the game follows his dominant strategy, the result is an "equilibrium" outcome in which each is worse off than if each had followed the alternative strategy. The law of international trade functions to inhibit national governments from following what appear to be rational short-run courses of action in the interest of achieving superior long-run outcomes for their nations and perhaps for themselves