Gottfried Haberler, “Liberal and Illiberal Trade Policy: The Messy World of the Second Best”

Haberler’s chapter is a compact defense of liberal trade policy in a world where pure free trade is politically rare and theoretical exceptions to it exist. Its argument is not that every trade barrier is equally irrational, but that the form of intervention matters decisively. Free trade remains the benchmark; if governments depart from it, Haberler wants restrictions to be transparent, nondiscriminatory, and price-based rather than administered through quotas, preferences, licenses, or bargaining.

In this chapter I take it for granted not only that free trade is the best policy, but also that under certain circumstances import tariffs can be justified; in other words, there exist some theoretically valid arguments for protection.

This framing lets Haberler distinguish liberal trade policy from both laissez-faire purity and illiberal managed trade. Tariffs may be second best, but they are visible, general, and compatible with market allocation. Quotas and voluntary export restraints, by contrast, replace prices with administrative allocation and generate rents for politically favored firms or foreign exporters. The chapter’s “messy world” is therefore not merely a world with protection, but one in which protection is hidden, discriminatory, and bureaucratically allocated.

Haberler locates the postwar GATT system, especially the most-favoured-nation principle, as the institutional core of liberal commercial order. MFN matters because it generalizes concessions, reduces discrimination, and limits the need for intrusive origin rules. Yet he emphasizes that the early postwar momentum weakened as governments increasingly turned to exceptions, regional preferences, and non-tariff barriers.

But the élan of trade liberalization of the first 15 or 20 years of the postwar period has evaporated.

The sharpest examples are quantitative restrictions. A tariff lets import volume adjust to supply and demand while public revenue accrues to the state. A quota fixes volume by fiat and creates scarcity rents. When licenses are allocated by past import shares or official discretion, the system rewards incumbents, invites lobbying, and conceals the real cost to consumers. Voluntary export restraints are even worse in Haberler’s account because they transfer the quota rent abroad. His example is the automobile restraint imposed on Japanese firms:

A well-known example, but unfortunately not the only one, is the export restrictions forced on – a better word would be 'granted' – Japanese automobile firms.

Haberler’s preferred remedy, where quotas cannot be abolished, is auctioning import licenses. This would not restore free trade, but it would reduce favoritism, recover rents for the public treasury, and preserve more of the nondiscriminatory logic of liberal policy. He treats the rarity of this solution as evidence that trade restrictions often persist because they serve organized interests, not because they are efficient.

Although all this is fairly obvious, the auction method has, as far as I know, rarely if ever been applied.

The chapter also criticizes preferential trading arrangements and customs exceptions. Haberler accepts that customs unions have a recognized place in trade law, but he is wary of free trade areas that retain divergent external tariffs and therefore require continuing customs surveillance. His skepticism extends to many developing-country regional schemes, which he sees as multiplying inefficient import-substitution industries rather than enlarging competitive markets.

Agriculture supplies the chapter’s most concrete political-economy critique. Haberler treats farm protection, especially sugar policy, as an example of intervention becoming internally contradictory: governments raise prices, induce excess production, then pay to idle land or dispose of surpluses. The burden falls on consumers, taxpayers, and foreign producers, including poorer countries that would otherwise export competitively.

The chapter’s enduring point is hierarchical rather than absolutist. Free trade is best; nondiscriminatory tariffs may sometimes be defensible; quotas, voluntary restraints, preferences, and discretionary licensing are worse because they obscure costs and distribute rents through politics. Haberler’s liberalism is therefore institutional as much as economic: he defends rules, transparency, and market allocation against the administrative sprawl of managed trade.