The Dynamics of International Intervention: Entrepreneurial Discovery & the Market Process

Abstract

While optimal tariff calculations can show the possibility for large nations to increase national income via protectionist policies, they do not tell the whole story. In this paper, I extend the dynamics of intervention to analyze the impact of tariffs on the entrepreneurial market process. I propose that the unintended consequences of using trade policy to bolster a nation's economy will inevitably prevent an economy from allocating its resources to their highest-valued use. Even if a government manages to improve the terms of trade or protect an infant or favored industry, the disruption of the market process will prevent an efficient allocation of resources. First, government intervention inhibits and alters the course of entrepreneurial discovery distorting the market's allocation of scarce resources to their highest-valued use. Second, the incentives of market participants are changed, discoordinating market and government systems and producing unintended negative consequences such as rising input costs, increasing substitution for the protected good, and proliferation of lobbying. Derailed discovery and unintended negative consequences force decision-makers to either expand the interventionist policy or repeal the intervention and move toward freer trade. I illustrate the theory with two historical trade wars: The Chicken War, 1963, and the US-Canada softwood lumber disputes, 1982-Present.

Keywords: International Trade, Trade Wars, Dynamics of Intervention

JEL Classification: F13, N72, N74