“At the moment, we have not witnessed a wholesale collapse of the modern trading system,” say Jacks and Novy. But we seem to be headed that way, they indicate. It’s certainly not an ideal destination, notes economist Douglas A. Irwin of Dartmouth College. Trading blocs suffer from two significant drawbacks, he says.
First, they sacrifice some economic benefits; decisions of where to buy and sell are determined by political considerations, not economic efficiency. This is a serious, but manageable, flaw.
The larger defect is that trade blocs become a source of international conflict. Rather than trading for mutual benefit, countries increasingly view trade as a way to punish their adversaries and reward their friends. That seems to be Trump’s belief, reflected in his threat to impose a 5 percent tariff on Mexican imports.