Those of us who teach and study international trade sometimes get the question: “how is international trade different from domestic trade?” From a purely analytical perspective, national borders do not change the fundamentals of trade.  Whether one is trading with Bart in Baton Rouge, Brad in Boston, or Brent in Berlin, the fundamentals stay the same: what one gives up are the costs, what one gets are the benefits, and, so long as both parties agree to the trade, the trade is prima facie mutually beneficial.  The accounting conventions of international trade often obscure these fundamentals (for example, the gains and costs to foreigners are often not counted, and phrases like “trade deficit” erroneously conjure up ideas of budget deficits and debt), but nevertheless, they remain.

But, while international borders are often invisible and arbitrary, that does not mean they are irrelevant.  Because a sovereign* has a legitimate right to limit what crosses the borders of its domain and the duty to defend the domain from legitimate and real threats, the sovereign may have to interfere in the otherwise free flow of goods, services, and people across borders.  Furthermore, since governments are made up of people, there is no particular reason to think they will not act in their own self-interest and be prone to petty behavior and conflict.  At the personal level, such pettiness will not affect trade patterns much.  But, given the awesome power even the most rudimentary government wields on international trade, such pettiness and self-interest can substantially affect patterns of trade, and thus our analysis.

Many trade models that underlie modern economic trade theory do not account for politics.  In some cases, they do not need to: analysis on the effects of tariffs, for example, do not often need to explicitly take into account the political economy issues discussed above.  Reducing transportation and communication costs will increase the volume of trade, at least in the short run, regardless of political issues.  

But the unusual authority sovereigns have over international, and their all-too-human motivations, can have distortionary effects.  Firms have to read political tea leaves and prepare for trade disruptions due to war or just petty politics.  And we, as analysts, need to have a theory of government in our models to know when certain outcomes can be expected and when some cannot.

To be fair, most trade economists understand this point and explicitly address political economy.  In Paul Krugman, Maurice Obstfeld, and Marc Melitz’s standard textbook International Economics, they have a chapter dedicated to political economy and trade.  One of the textbooks I use in my International Trade class, International Economics by Robert Carbaugh, similarly devotes a large amount of text to discussing the political economy of tariffs, non-tariff trade barriers, trade regulations, and industrial policy.  After reading the discussions in these two textbooks (and, indeed, most writings on international trade), one very much sees how considering political economy often inverts the goal of government interventions in international trade: antidumping legislation is used to protect monopolies rather than prevent them, “optimal” tariffs trigger trade wars and significantly reduce national welfare, repatriotization of supply chains makes them more fragile rather than less, and so on.  

To be clear, politics does matter in domestic economics as well.  All social exchange takes place under the shadow of the law.  But those shadows are much deeper and more tangible in international trade.

*Note: I am using “sovereign” here in a very broad sense to mean the entire institution of a government.  It could be King-in-Parliament like in Great Britain, the Federal Government apparatus of Congress and the President like in the United States, or a dictator.  The “sovereign” is an institution, not an individual per se.