Trade and the theory of second best

Fathom Consulting // Insights // Trade and the theory of second best

Rarely out of the news since Donald Trump’s election victory back in 2016, the topic of ‘Trade Wars’ has returned with a vengeance this week. Asian stocks fell sharply on Tuesday, following news that the US Commander in Chief had asked officials to seek out a further $200 billion of Chinese imports that might be subject to tariffs. Following the work of David Ricardo, writing more than 200 years ago, many would see a belief in global free trade as the sine qua non of modern economics. The theory of comparative advantage has stood the test of time, and deservedly so. But there is another important contribution to the economist’s toolkit that is sometimes overlooked — the general theory of second best, associated with work by Richard Lipsey and Kelvin Lancaster in the 1950s. In this Fathom In Depth, we argue that…