Size, Sunk Costs and Judge Bowker’s Objection to Free Trade
Author(s)
McLaren, John
Abstract
In trade liberalization between a large country and a small one, if production requires irreversible investments, anticipated negotiations may make the small country strictly worse off than a fully anticipated trade war, and indeed worse off than autarchy. The reason is that investors, anticipating liberal trade, will invest in the export sector, making the small country dependent on trade with the large one and thus ruining its bargaining power. This effect is dominated by conventional effects, so that anticipated bargaining benefits the small country on balance, if there is sufficient: (i) dissimilarity between the economies, and (ii) substitutability between goods.
