Chapter 8 Domestic Policies and International Trade
Increasingly, at international forums where policymakers are discussing international trade issues, the topic of discussion is not what trade policies countries are using but rather what domestic policies are in place. The reason is that in our interconnected and globalized world, the domestic policies affecting energy, the environment, labor markets, health, and many other matters will affect not only what happens at home but also what, and how much, is traded and invested, and thus the outcomes for producers and consumers abroad. In short, domestic policies have international repercussions.
This chapter explores several simple domestic policies and investigates how these policies can affect trade flows with other countries. It also examines the welfare effects of these policies and concludes with a very important insight: that trade policies can be duplicated with a combination of several domestic policies. The implications of this notable insight are explored.