Tuesday, April 9, 2013

Relations between Free Trade and Economic Protection: A Game Theory Analysis

Relations between Free Trade and Economic Protection: A Game Theory Analysis


Lin and Lee (2012) state that there is a conflict between mutual policies between countries over discussions that result in a stalemate between free trade and environmental protection issues.  The authors' goal of their research endeavor was to find actions in which both parties can pursue both policies of free trade and environmental protection that do not harm both sides and can result in positive-sum games for the parties involved.  Thus, Lin and Lee (2012) had the purpose of using game theory to: "examine the possibility of including environmental issues into trade negotiations and examining the impasse confronting the coordination between trade and environmental protection (592)."

The results of the study demonstrated that once trade and environmental liberalization were brought in together within negotiations, the international community was more likely to combine both trade and environmental issues into the decision-making process.  Overall, this finding benefited developed nations interests' and forced developing nations to join in the discussions or be left out all together.  Moreover, the developing nations seem to stick to their own agenda and have different priorities as compared to the developed nations in terms of trade and economic polices.  The authors state that the extreme differences between the North and the South countries disturb the balance between trade and environmental policy negotiations (Lin and Lee, 2012).

Through various Prisoner Dilemma's (PD),  Lin and Lee (2012) examined various issues that pertained to trade agreements and environmental protection, which can be witnessed by the graphic above.  Through the utilization of the above PD, the authors came to the following conclusions for developed and developing nations.  Developed nations believe that trade restrictions were the most powerful decision-making option to solve environmental issues against the second party.  Environmental protection is a top priority in terms in conducting international trade.  Lastly, the developed nations were more likely to strive for unification of international environment standards as compared to developing nations (Lin and Lee, 2012).

The PD emphasized that developing nations view economic development and the elimination of poverty as their top challenges.  In addition, developing nations affirm that tariffs known as green barriers which are created for environmental protection, negatively affect the developing nations export economy.  The developing nations can not meet the environmental standards initiated by the developed nations due to limited financial resources.  This aspect is likely to increase production costs in developing nations, but also will reduce the amount of exports.  Lastly, the developing nations see it as unethical that the developed nations ban their products from being exported into their country, but consistently move their environmentally harmful production facilities into the developing countries around the globe (Lin and Lee, 2012).


It was interesting how the authors utilized game theory to examine the possibility of including environmental issues in trade negotiations between developed and developing nations.  The use of PD displayed some interesting characteristics of the differences in decision-making and viewpoints as it curtailed to trade and environmental negotiations between the viewpoints of developed and developing nations.  The findings presented in this study would be able to display to decision-makers the differing viewpoints between developed and developing nations and applying this knowledge to better serve the needs of the two parties.  Hence, creating positive sum games.  This knowledge may be able to provide decision-makers the ability to likely increase the effectiveness of negotiations that bring in environmental factors into trade agreement conversations.

However, the study needs to elaborate further what changes to the PD would create the scenario for developing nations to become more willing to participate in trade negotiations that bring in environmental issues.  More in-depth utilization of PD would allow the authors to determine what scenarios made developing nations stick to their own criteria/decisions and how could those scenarios be reversed to allow for mutual cooperation between the parties. Overall, this study brings up intelligence gaps that could be further researched to provide possibly more actionable intelligence for a decision-maker who deals in negotiations of trade and environmental issues between nations of differing economic standing.


Lin, C.M. & Lee, C.K. (2012). Relations between free trade and economic protection: a game theory analysis. International Journal of Management, 29 (2), 591-605. Retrieved from http://ehis.ebscohost.com/ehost/detail?sid=6e2f16a5-67b2-478f-b717-fad8b32698c0%40sessionmgr10&vid=1&hid=6&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=bsh&AN=76442241. 


  1. This was an interesting application of the prisoner's dilemma unlike others I had come across in my research of game theory. I agree with you that the research leaves quite a few gaps in terms of what can be done to foster mutual cooperation. In this sense, this application of game theory seems like a good methodology to define what actions a nation could take, but not necessarily what changes, unexpected especially, will affect these decisions. Perhaps a different application of game theory would help fill this void.

  2. Environmental policies are some of the most difficult policies to handle, particularly for developing countries. Streams and air (common pollution areas) are both public goods, which means that no one owns them (and thus, no one feels responsible for them). Clean energy (nuclear, wind, and hydroelectric) all help to alleviate environmental problems, but are very expensive. Thus you have the situation of environmental policies being placed on developing countries which can't make money because they're restricted in the pollution output and can't afford clean energy methods. Where advanced countries have either gotten a head start (US & UK with industrial revolution) or ignore it (China) before the environmental policies were created. If push comes to shove, the US can afford to decrease their pollution output whereas countries such as Honduras could not survive the international market if their products are way over priced due to having to spend so much on environmental cleanliness.

    I think the main reason the authors didn't come up with a solution is because there really isn't one. You can't buy environmental cleanliness with nothing. I like that they applied game theory to this problem- it makes sense to try. However, this problem is way more complex than a game in isolation (two factors, trade restrictions and pollution restrictions), and I'm not surprised no solutions came out of this research.