I show that the protectionism story is superior, empirically and theoretically: countries do not exploit their market power, and the theoretical perspective of the terms-of-trade story is wrong if our concern is to interpret agreements. I analyse the two stories to dispel common conceptual confusions. Protectionism theorists think terms-of-trade manipulation is rare in the real world terms-of-trade theorists adopt a theoretical perspective in which they prove protectionism is globally efficient and should not be restrained. Logically, trade agreements might restrain both protectionism and terms-of-trade manipulation, but no one holds this view.
These stories are distinct, because protectionism and terms-of-trade manipulation are distinct, although they are often confused. Economists tell two stories about the function of trade agreements: trade agreements restrain protectionism, or trade agreements restrain the purposeful exploitation of market power, which I call ‘terms-of-trade manipulation’.
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