The Free Trade and Protectionism Dividing Line: A Profit Maximization Approach

Abstract

The ongoing debate between proponents of free trade and protectionism stems from the lack of the free trade and protectionism dividing line in manufacturing industries, upon which countries can agree. In this paper, we determine from a duopoly model of differentiated products this trade line, the GATT line and the domestic industry's stay-exit function to show when protectionism, managed or free trade should be implemented. This framework is used to propose strategies that can prevent the destruction of a domestic industry. In addition, we propose the rules that can avert a trade war and increase the world community's wealth.