Final answer:
Game theory explains the paradox of countries preferring protectionist policies over free trade due to the perceived immediate benefits to domestic industries and difficulties in coordinating international policies. Trade organizations like GATT and WTO exist to promote free trade but face challenges from national interests.
Step-by-step explanation:
The paradox where countries would benefit from free trade but instead engage in protectionist policies can be explained through game theory. Although free trade expands consumption possibilities, certain sectors within each country may suffer due to foreign competition. Consequently, nations might adopt protectionist measures to shield domestic industries at the expense of broader economic gains. The General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), aim to reduce trade barriers and negotiate fairer trade rules among member countries. However, domestic political pressures often lead governments to enact policies that protect specific local industries. This is often achieved through tariffs, quotas, and non-tariff barriers. Protectionism can lead to higher prices for consumers and inefficiencies in the market, potentially hurting the economy more broadly.
Game theory suggests that while collective free trade is beneficial, individual nations default to protectionist policies due to the potential immediate benefits to certain domestic industries and the difficulty of coordinating policies internationally. These countries face a dilemma similar to the well-known prisoner's dilemma, where mutual cooperation would lead to the best outcome, but the incentive to deviate from cooperation for individual gain leads to worse outcomes for all involved.