William Spaniel: International Relations 101 - International Relations 101 (#9): Tariffs and the Barriers to Free Trade

http://gametheory101.com/courses/international-relations-101/ Prior to World War II, states routinely taxed goods imported into their country. Although this makes domestic products more competitive within the country's own borders, the tariff system led to an overall inefficient economic system. Why were taxes the norm back then, and why is it so difficult to establish free trade? Modeling free trade as a prisoner's dilemma provides an explanation. Although everyone is collectively better off with free trade, individual incentives tell states to place tariffs on imported goods. Thus, although the result is collectively crazy, it is individually rational. Yet, in the post-World War II era, free trade has become the norm. As such, this video raises a new question: how is free trade sustainable given the prisoner's dilemma logic? We will explore this type of cooperation after the next lesson.