Question

“There is no point in the United States complaining about trade policies in Japan and Europe. Each country has a right to do whatever is in its own best interest. Instead of complaining about foreign trade policies, the United States should let other countries go their way, and give up our own prejudices about free trade and follow suit.” Discuss fully both the economics and the politically economy of this view point. Use “Prisoner’s Dilemma” as part of the analysis.

Answer 1

Prisoner's dilemma arises when two individuals who are acting as per their self interest, do not tend to produce the optimal outcome which benefits both of them. Thus making decisions according to their self interest leads to both the parties suffering at the expense of another.

Thus if Japan and Europe frame trade policies which benefits them economically, they behave as per their self interest and fail to gain the optimal outcome if they would have collaborated instead. For example Japan will only get to export $5bn worth of goods as per their self interest, while Europe will export just $7bn worth of goods. But if they would have collaborated, then they would have got the opportunity to export $9bn worth of goods individually which would have proved beneficial for both the countries and could have been the optimal outcome for both the countries.

Thus if USA tries to intervene, a common ground can be found by showcasing the mutual benefits derived for both the countries, this will increase economic power of both the regions and enhance the political gains achieved by mutual cooperation which will increase investments and opportunities for citizens in both the regions if both of them follow the terms of trade diligently and don't act as per their self interest.