The Political Economy of Trade (International Economics)

The Prisoner`s Dilemma The prisoner`s dilemma, in the context of international trade, refers to a problem characterized by two countries that may benefit individually, by compromising the well being of the other. However, if both countries reached an agreement to compromise a certain bit, then both would benefit by more than when they had not agreed to do so (Krugman & Obstfeld, 2008). Let us consider an example of China and Mexico as the only two countries that can produce steel in the global market. Let us also assume that producing steel will be considered beneficial by both countries for their trade balance. Therefore, no matter what China or Mexico decides to do, each will opt for the production of steel in attempt to gain a favorable balance of trade, by 10 times. Hence, Mexico and China would expect to receive ten times more of a cash inflow, if they acted individually. At the same time however, assuming that the demand for steel is fixed in the global mar...