We shall employ the economic analyses of infant industry argument and some game theories such as the Tragedy of the Commons and the Prisoner's Dilemma to assess the effect of the possible trade between the two countries.
International trade traces its roots from the modern economic concepts popularized by economists such as David Ricardo. Particularly, it has its foundation on the "principles of comparative advantage" which supports international trade (Mankiw).
Introduced by David Ricardo in 1817 through his book On the Principles of Political Economy and Taxation, comparative advantage posits that trade can create value for both countries even if one has the fewer resources in the production of all goods. Using the production possibilities frontier, Ricardo was able to prove this, achieving a significant breakthrough in the field of international economics.
Practically, Ricardo believes that given the situation, both countries can still gain by having the less efficient country specialize in the production and exportation of the commodity in which its absolute disadvantage is smallest and import the product in which it has its greatest absolute disadvantage. The commodity in which one country has the least absolute disadvantage can be thought of as one in which it has the comparative advantage. ...
Therefore, if each 'economic agent' (firm, person, country) does what he, she, it does best, and each trades some of the results for what others do best, then everyone can be better off in terms of the amount of goods and services available to them" (Mackintosh).
This argument that asserts the gains from trade is not only concerned about international trade; it is also an issue of most of the debates in the politics of economic policy. It is an argument for freedom of specialization and trade (Mackintosh).
In a high-income and low-income country comparison, the book, Making the International: Economic Interdependence and Political Order highlighted that in a two-commodity example of food and pills, specialization will benefit both countries as each will be producing the commodity with the least opportunity cost, simply saying that trade can help increase income even for the low-income countries (Mackintosh).
The Rise of Bilateral Trade
In the recent years, there is an observed rise in the number of bilateral trade agreements between countries. Experts say that for a powerful country like the USA, "smaller FTAs accomplish the goal of liberalization and the expansion of markets for U.S. goods" in the absence of a broader agreement like the Doha round (MacMahon). On the part of the smaller countries, bilateral trade agreements increase the local employment and provide a better climate for investors from the powerful nations (MacMahon).
A significant general reason for the rising popularity of bilateral trade agreements is the disenchantment with the progress with liberalization at the multilateral level. The difficulties and failures associated with concluding the Doha round have simply supported this view. "Many feel that