We show that the second-best case against the optimality of free trade remains valid in the face of a well-targeted, but costly, policy response. Trade between a North, where property rights can be enforced at relatively low cost, and an otherwise identical South, yields trade patterns and...

The Theory of the Second Best implies that any country with less-than-ideal resources can lose from international trade. Recently it has been suggested this means the South (poor countries) are better off suppressing trade with the North, especially trade in natural resource products, since the...