ABSTRACT
This chapter surveys the most important trade policy concepts with particular emphasis on the new political economy or public choice view of protection. In the latter approach, protectionism is a distributional problem. Although free trade is, as a rule, the welfare-maximizing trade policy, it is often not implemented because the political process does not compensate the losers from a policy change. On the contrary, special interests can gain from seeking protection at the expense of the rest of the economy. This can result in a Prisoners’ Dilemma (PD) rooted at the national level where no interest group has an incentive to abstain from lobbying. The country as well as the special interests would be worse off in such a PD. A constitutional economics approach to this problem with rules constraining the protectionist options of policy makers is suggested as a remedy.
