Mutual causation of predation and trade induces novel effects of commercial policy in this paper. The model can explain trade volume responses to market widening initiatives that are otherwise puzzlingly 'too big' or 'too small'. Efficient commercial policy (broadly defined) depends crucially on the strength of enforcement. Externalities arising between traders are normally internalized by subsidizing (taxing) trade when enforcement is weak (strong). Efficient regional policy squeezes weak enforcement markets while subsidizing strong enforcement markets. Tolerance (intolerance) of smuggling is rational when enforcement is weak (strong).
Predation---extortion or theft---imposes significant endogenous costs on trade, with rich implications for trade policy. The model of this paper shows that the response of trade to liberalization depends on the strength of enforcement against predators. Efficient commercial policy may either tax or subsidize trade. The Mercantilist predilection for trade monopoly and for subsidy has a rationale. Insecurity induces an international externality alternative that of the standard terms of trade effect. Tolerance or intolerance of smuggling can be rational depending on the weakness or strength of enforcement, illustrated by the switch from the former to the latter by Britain in regard to its North American colonies.
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