Peer commentaries on Keynote articles Trade gains for small island economies

Abstract

To what extent are the problems of small island economies unique, thus compromising the potential welfare gains from freer international trade? Is comparative advantage enough or even relevant in analysing the benefits from international trade for such economies? If the answer to the latter question is in the negative, then how can the WTO process be modified to maximise gains to the participants? Alan Winters and Pedro Martins (W&M) analyse the first of these two questions, arguing that comparative advantage is not enough, while Aaditya Matoo and Arvind Subramanian (M&S) come to the conclusion that desirable ways of addressing concerns of small countries within the WTO process are proving to be infeasible. Even though W&M and M&S raise legitimate concerns about small economies, I disagree with their policy conclusions. I argue below that comparative advantage is as applicable to small countries as to large countries and that liberal and uniform trading rules for all countries, with the option of temporary lump-sum transfers to the vulnerable ones, can achieve the dual objectives of economic efficiency with redistribution.