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Is Free Trade Really Free? Why Protectionism Is Alive and Well

February 8, 2016 • 10 min read.

Most countries say they favor free and fair trade. But is protectionism really dead? And if not, how does it affect the progress of emerging markets?

essay on free trade vs protectionism

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Recently, it was reported that the three largest U.S. airlines — American, United, and Delta — are protesting three major Persian Gulf-based airlines’ right to fly in the U.S. market. The American carriers claim that the Gulf carriers (Qatar Airways, Emirates, and Etihad) have received $42 billion in subsidies from their governments over the past several years, amounting to an unfair trade advantage that enables them to offer better and lower-cost service.

The controversy doesn’t surprise Reuben Abraham, CEO and senior fellow at IDFC Institute (a Mumbai-based think tank) and a member of the World Economic Forum Council on Emerging Multinationals. “There’s no doubt about it: The Gulf carriers, [or for example] state-owned enterprises in China — all of them have some level of state subsidies embedded into them. But one mustn’t forget that equally there are subsidies embedded into products on the other side of the world.”

He gives the example of the iPhone. “Most of the technology inside of an iPhone in some point in time or another has been funded by the U.S. government…. Lithium-ion batteries came out of research funded by the [Department of Energy],” he says, naming a host of other essential inventions — liquid crystal displays, micro hard drives, microprocessors and click wheels — that he says fall into the category of government-supported. This argument was put forth by economist Mariana Mazzucato in her 2013 book, The Entrepreneurial State.

“Now, you want a level playing field for the iPhone to compete in fair markets like India,” says Abraham. “[But] if I’m an Indian firm manufacturing let’s say a smartphone, it’s a little hard for me to compete against something that has a state subsidy.”

Protectionism: Not Gone, Just Underground

Leaders at the 2009 G20 summit in London — a group representing both developed and developing markets and accounting for 85% of the global economy — pledged they “would not repeat the historic mistakes of protectionism of previous eras.” And over a decade earlier in 1995, the World Trade Organization (WTO) was established to promote free trade and reduce trade barriers between nations. It now has 162 member countries.

Yet it appears that protectionism is by no means dead, according to Abraham as well as Ann Harrison, a Wharton management professor, and Tarun Khanna, a professor at Harvard Business School and a colleague of Abraham’s on the World Economic Forum Council on Emerging Multinationals. They say that protectionism, while certainly not as overt as it was 50 or 60 years ago, still exists in subtle and varied forms.

“An emerging market is actually competitive vis a vis labor…. My competitive advantage is not the iPhone … it is my techie.” –Reuben Abraham

“It’s not so black and white anymore,” says Khanna. Protectionism seen in the past was overt, he notes — such as having to pay tariffs of 40%, 50% or even 80% on imported cars. “In the old days, you had those [tariffs] in India and many countries in Africa.” The obvious result, he says, was that “the domestic providers of [items such as] cars were entirely protected, so they continued to produce terrible cars.”

Why Do Nations Practice Protectionism?

Harrison characterizes today’s anti-dumping and countervailing duty policies as a common form of protectionism used by most large countries including the U.S., EU, India, China and Mexico, although, she notes, the policies are sometimes put forth as a way to enforce fair trade. In these scenarios, a foreign firm introduces a low-cost product into an industrialized country such as the U.S. If the U.S. believes that the firm receives unfair advantages from its government, it will impose tariffs. “Brazilian orange juice, Mexican tomatoes … the list goes on and on,” says Harrison, adding that the tariffs can be very high. “When China was found guilty of dumping garlic, the garlic duty was 300%.”

Abraham points to farm subsidies as another form of protectionism. “You’re basically protecting domestic agricultural industry for political reasons.” Khanna agrees: “You see plenty of [this type of] protectionism in Japan … the Midwest United States, and so on.”

There can also be “disguised protectionism” in the form of health and safety requirements, says Harrison, as when a country blocks an import that it claims is dangerous to its consumers. Protectionism can even take the form of a marketing message: Harrison cites the U.S.’s “Buy American” campaign.

Khanna identified a prevalence of what he calls “bundled deals,” or “you can do this if you do that,” which he says are hard to characterize as purely protectionist. He says that China, for instance, has tended over the past seven or eight years to tell foreign companies wanting to build factories in China that in return, they will have to transfer some intellectual property to indigenous manufacturers. “It’s a little bit of an industrial policy type of issue, and it’s not strictly protectionism in the sense of being a tariff barrier…. It’s part of their bargaining power.”

Protectionism is not limited to the movement of goods, says Abraham. He states that another aspect involves labor, and that a “weird sort of hypocrisy” exists in the developed world on this point. “By and large, in the West when they talk about free trade, they’re talking about capital and capital goods — because that is where the West is competitive. But … an emerging market is actually competitive vis a vis labor.” He adds that from India’s perspective, for instance, “my competitive advantage is not the iPhone … it is my techie.”

In Abraham’s view, visas — and visa quotas — constitute “non-tariff trade barriers. It’s very hard for an Indian businessman to get a U.S. visa.” He adds that if an Indian professional wants to attend multiple conferences in Europe, for example, policies there require that the attendee apply for multiple short-term visas that grant only a handful of days’ stay for each event. “The average Westerner has no idea,” he says.

Is Protectionism Directed Against Emerging Markets?

The experts agree that in general, a freer trade environment rather than protectionism is better for the world economy. Khanna states that with protectionism, “you’re impeding the free flow of stuff that you might want to buy, or money that you and I want to invest, or talent that you and I might have, that needs to find its way to its best use.”

“Many countries have tried to use protectionism to nurture their home industries — but even though it makes sense in theory, countries screw it up about 75% of the time.” –Ann Harrison

Harrison observes that emerging markets might have some justification for being protectionist since their economies are struggling to establish themselves. On the other hand, she points out, this doesn’t always work well in practice. “Many countries have tried to use protectionism to nurture their home industries — but even though it makes sense in theory, countries screw it up about 75% of the time.”

She gives India as an example, saying that in the past it attempted to use protectionism to promote its nascent industries, but has only really become a successful, faster-growth country since it liberalized its economy in the early 1990s.

Are developing countries a particular target of protectionism by developed nations, as some have argued? Harrison says no. “I don’t think that emerging market multinationals are being targeted in any particular way. I think home countries just want to protect their own markets and promote their own firms, and I don’t think they discriminate in doing so.”

For instance, the French are “really trying to hold onto their cultural heritage,” she notes. And if one looks at the behavior of the French entertainment industry, for example, “they’re trying to … keep it as French as possible,” and “they don’t care where those foreign companies are coming from — whether emerging markets or the U.S.” She cites a similar example from the developing world. “Right now, India is protecting its retail sector, and it doesn’t care whether it’s a Walmart, a Carrefour or a Chinese retailer; it just wants to try to preserve the small mom-and-pop Indian stores.”

Abraham, on the other hand, does not dismiss the possibility of racism being an element in protectionism. He cites the much-publicized 2006 takeover of Arcelor, a French steel manufacturer, by Mittal, a company with its origins in India. According to The New York Times , Arcelor’s then-CEO, Guy Dollé, had made comments such as calling Mittal’s products lowly “eau de cologne” compared with the “perfume” produced by his own company. The comment where “racism really came out,” in Abraham’s view as well as others’, was when Dollé “actually had the gall to describe Mittal’s money as ‘monkey money.'”

Abraham also noted that Arcelor sought an alternative deal with a Russian steelmaker, recalling that Dollé praised that firm’s owner as “a true European.”

Khanna believes that countries’ levels of protectionism may ebb and flow with the political climate. Foreign business interests may become a target. “If you’re a politician and things aren’t going well economically and you want to get re-elected, an easy group to beat up is foreigners. They don’t vote.” This is true everywhere, he added, both in emerging markets and the developed world.

“If you’re a politician and things aren’t going well economically and you want to get re-elected, an easy group to beat up is foreigners. They don’t vote.” –Tarun Khanna

Along those lines, Abraham referred to the 1993 American movie Rising Sun , which he says played on popular sentiments of the time by portraying how Japanese business interests were “taking over everything in the United States…. It’s the flavor of the year, whether the Japanese or the Chinese or the Indians; it goes through these cycles.”

In looking at current trends, Khanna comments that protectionism “seems to be in great danger of rising,” calling it “one of those insidious things that we need to be vigilant about at all times.” He cites several potential contributing factors, including the increasing dominance of the far right and center right parties in Europe, a large number of “political and economic hotspots” in the world, and a general economic slowdown. This may lead to an environment, he says, in which countries “tend to favor the locals and batten down the hatches.”

The Danger of Blocs Over Free Trade

Both Harrison and Abraham see a trend toward preferential or regional trading blocs rather than multilateral global free trade, and predict it will continue. Harrison says the world is “clearly moving in the direction of … three giant blocs, with the Americas in one bloc, Europe in another bloc and Asia in another.” She notes that this trend benefits countries like the U.S., but very low-income countries — those “who are not big enough to come to the table” — typically get left out.

She adds that the Trans-Pacific Partnership Agreement (TPP) is an example of a regional trade agreement, and is “truly a way of keeping some countries in and keeping other countries — for example, China — out.” It is an example of “protectionism that is still alive and well.”

Abraham agrees, noting, “The U.S. wants to write the rules of that trade agreement, and then invite China at a later date…. But what if China, India and a couple of other countries make their own preferential trade agreement and leave the U.S. out? As the clout of these countries basically goes up, you may see more and more of that.”

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Free Trade vs. Protectionism

What's the difference.

Free trade and protectionism are two contrasting approaches to international trade. Free trade promotes the unrestricted flow of goods and services across borders, with minimal barriers such as tariffs and quotas. It aims to maximize economic efficiency, promote competition, and enhance consumer choice. On the other hand, protectionism advocates for the use of trade barriers to shield domestic industries from foreign competition. It seeks to protect domestic jobs, industries, and national security. While free trade fosters global economic integration and specialization, protectionism prioritizes domestic interests and can lead to trade wars and reduced global cooperation.

Further Detail

Introduction.

Free trade and protectionism are two contrasting approaches to international trade. Free trade promotes the exchange of goods and services between countries without any barriers, such as tariffs or quotas, while protectionism aims to shield domestic industries from foreign competition through the implementation of trade barriers. Both approaches have their own set of advantages and disadvantages, which we will explore in this article.

Advantages of Free Trade

One of the key advantages of free trade is the potential for economic growth. By allowing countries to specialize in the production of goods and services in which they have a comparative advantage, free trade enables efficient allocation of resources. This specialization leads to increased productivity, economies of scale, and ultimately, higher economic output.

Furthermore, free trade fosters competition, which drives innovation and technological advancements. When domestic industries face competition from international players, they are compelled to improve their products and processes to remain competitive. This results in better quality goods and services, as well as increased efficiency.

Another benefit of free trade is the access to a wider variety of goods and services at lower prices. When trade barriers are removed, consumers have access to a global market, allowing them to choose from a broader range of products. This increased competition among suppliers leads to lower prices, benefiting consumers who can purchase goods and services at more affordable rates.

Moreover, free trade promotes diplomatic relations between countries. By engaging in trade, nations establish economic interdependence, which can lead to stronger political ties and reduced likelihood of conflicts. Trade can act as a catalyst for cooperation and understanding, fostering peace and stability in the international arena.

Lastly, free trade can help alleviate poverty and promote development in less developed countries. By providing access to larger markets, these countries can export their goods and generate income, which can be invested in infrastructure, education, and healthcare. Free trade can serve as a tool for economic empowerment and poverty reduction.

Disadvantages of Free Trade

While free trade offers numerous advantages, it is not without its drawbacks. One of the main concerns is the potential for job displacement. When domestic industries face competition from foreign producers, they may struggle to compete and may be forced to downsize or shut down. This can lead to unemployment and economic hardships for affected workers and communities.

Additionally, free trade can result in income inequality. Although overall economic growth may occur, the benefits may not be evenly distributed. Certain industries or regions may thrive, while others may suffer. This can exacerbate income disparities within a country, leading to social and political tensions.

Another criticism of free trade is the potential for exploitation of labor and environmental standards. In the pursuit of lower production costs, some countries may engage in practices that violate human rights or harm the environment. This can lead to ethical concerns and calls for stricter regulations to ensure fair and sustainable trade practices.

Furthermore, free trade can make countries vulnerable to economic shocks. When a country heavily relies on imports for essential goods, it becomes susceptible to disruptions in global supply chains. Natural disasters, political conflicts, or trade disputes can disrupt the flow of goods, leading to shortages and price volatility.

Lastly, free trade can pose challenges for developing countries that lack the necessary infrastructure and resources to compete on a global scale. Without adequate support and capacity-building measures, these countries may struggle to benefit from free trade and may become marginalized in the global economy.

Advantages of Protectionism

Protectionism, despite its criticisms, also offers certain advantages. One of the main benefits is the protection of domestic industries and jobs. By imposing tariffs or quotas on imported goods, protectionist measures can shield domestic producers from foreign competition, allowing them to maintain or expand their market share. This can help preserve jobs and support local economies.

Moreover, protectionism can be used strategically to nurture infant industries. By providing temporary protection, governments can enable domestic industries to grow and become competitive before facing international competition. This approach has been successfully employed by several countries to develop key industries and gain a competitive edge in the global market.

Additionally, protectionism can be a tool for national security. Certain industries, such as defense or critical infrastructure, may be deemed strategically important for a country's security. By implementing protectionist measures, governments can ensure the self-sufficiency and resilience of these industries, reducing dependence on foreign suppliers.

Furthermore, protectionism can address unfair trade practices, such as dumping. Dumping occurs when foreign producers sell goods in another country at prices below their production costs, often with the intention of driving domestic competitors out of business. Protectionist measures can be used to counteract such practices and safeguard domestic industries.

Lastly, protectionism can provide governments with leverage in trade negotiations. By having the ability to impose trade barriers, countries can negotiate better terms and conditions for their domestic industries. Protectionism can be used as a bargaining tool to secure favorable trade agreements and protect national interests.

Disadvantages of Protectionism

Despite its advantages, protectionism also has its downsides. One of the main drawbacks is the potential for retaliation and trade wars. When countries impose trade barriers on each other, it can escalate into a cycle of retaliatory measures, leading to reduced trade volumes and increased tensions. Trade wars can harm global economic growth and stability.

Moreover, protectionism can lead to higher prices for consumers. When tariffs or quotas are imposed on imported goods, it restricts competition and reduces the availability of affordable options. This can result in higher prices for consumers, particularly for goods that are not easily substitutable or produced domestically.

Another criticism of protectionism is the potential for inefficiency and reduced productivity. When domestic industries are shielded from competition, they may become complacent and less motivated to innovate or improve their processes. This can hinder overall economic growth and limit the potential for technological advancements.

Furthermore, protectionism can strain diplomatic relations between countries. Trade barriers can be seen as acts of economic aggression, leading to strained political ties and reduced cooperation in other areas. Protectionism can hinder global collaboration and impede progress on shared challenges.

Lastly, protectionism can limit consumer choice and access to a wider range of goods and services. By restricting imports, protectionist measures can reduce the variety of products available in the domestic market. This can limit consumer options and hinder the ability to benefit from global innovation and diversity.

Free trade and protectionism represent two contrasting approaches to international trade, each with its own set of advantages and disadvantages. Free trade promotes economic growth, innovation, access to a wider variety of goods, and diplomatic relations. However, it can lead to job displacement, income inequality, exploitation, vulnerability to economic shocks, and challenges for developing countries. On the other hand, protectionism can protect domestic industries and jobs, nurture infant industries, enhance national security, address unfair trade practices, and provide leverage in negotiations. Nevertheless, protectionism can result in retaliation, higher prices, inefficiency, strained diplomatic relations, and limited consumer choice. Ultimately, the choice between free trade and protectionism depends on the specific circumstances and goals of a country, and finding the right balance is crucial for maximizing the benefits of international trade.

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11: Evaluating the Controversy between Free Trade and Protectionism

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Perhaps the most important policy issue of an international trade course is to answer the question “Should a country pursue free trade or some type of selected protection?” Academics, philosophers, policy analysts, and legislators have addressed this question for hundreds of years. And unfortunately, there is still no definitive answer.

The reason is that both free trade and selected protection have both positive and negative aspects. No one policy choice is clearly superior. Nonetheless, economists who have studied trade theory and policy tend to support free trade more so than just about any other contentious economic policy under public consideration. The reasons for this near consensus are complex and poorly understood by the general public. This chapter explains the economic case for free trade through the lens of trade theory and argues that even though free trade may not be “optimal,” it is nonetheless the most pragmatic policy option a country can follow.

  • 11.1: Introduction The original arguments for free trade began to supplant mercantilist views in the early to mid-eighteenth century. Many of these original ideas were based on simple exchange or production models that suggested that free trade would be in everyone’s best interests and surely in the national interest. During the nineteenth and twentieth centuries, however, a series of objections were raised suggesting that free trade was not in everyone’s interest and perhaps was not even in the national interest.
  • 11.2: Economic Efficiency Effects of Free Trade The main source of support for free trade lies in the positive production and consumption efficiency effects. In every model of trade, there is an improvement in aggregate production and consumption efficiency when an economy moves from autarky to free trade. This is equivalent to saying that there is an increase in national welfare.
  • 11.3: Free Trade and the Distribution of Income Although most trade models suggest that aggregate economic efficiency is raised with free trade, these same models do not indicate that every individual in the economy will share in the benefits. Indeed, most trade models demonstrate that movements to free trade will cause a redistribution of income between individuals within the economy. In other words, some individuals will gain from free trade while others will lose.
  • 11.4: The Case for Selected Protection An argument for selected protection arises in the presence of imperfectly competitive markets, market distortions, or both. In these cases, it is often possible to show that an appropriately targeted trade policy (selected protection) can raise aggregate economic efficiency. In other words, free trade need not always be the best policy choice when the objective is to maximize national welfare.
  • 11.5: The Economic Case against Selected Protection The economic case against selected protectionism does not argue that the reasons for protection are conceptually or theoretically invalid. Indeed, there is general acceptance among economists that free trade is probably not the best policy in terms of maximizing economic efficiency in the real world.
  • 11.6: Free Trade as the "Pragmatically Optimal" Policy Choice The economic argument in support of free trade is a sophisticated argument that is based on the interpretation of results from the full collection of trade theories developed over the past two or three centuries. These theories, taken as a group, do not show that free trade is the best policy for every individual in all situations. Instead, the theories show that there are valid arguments supporting both free trade and protectionism.

essay on free trade vs protectionism

Chapter 11 Evaluating the Controversy between Free Trade and Protectionism

Perhaps the most important policy issue of an international trade course is to answer the question “Should a country pursue free trade or some type of selected protection?” Academics, philosophers, policy analysts, and legislators have addressed this question for hundreds of years. And unfortunately, there is still no definitive answer.

The reason is that both free trade and selected protection have both positive and negative aspects. No one policy choice is clearly superior. Nonetheless, economists who have studied trade theory and policy tend to support free trade more so than just about any other contentious economic policy under public consideration. The reasons for this near consensus are complex and poorly understood by the general public. This chapter explains the economic case for free trade through the lens of trade theory and argues that even though free trade may not be “optimal,” it is nonetheless the most pragmatic policy option a country can follow.

11.1 Introduction

Learning objective.

  • Understand the basis for the modern support for free trade among economists.

For hundreds of years, at least since Adam Smith’s publication of The Wealth of Nations , the majority of economists have been strong supporters of free trade among nations. Paul Krugman once wrote that if there were an economist’s creed, it would surely contain the affirmation, “I advocate free trade.” See Paul Krugman, “Is Free Trade Passe?” Journal of Economic Perspectives 1, no. 2 (1987): 131–44.

The original arguments for free trade began to supplant mercantilist views in the early to mid-eighteenth century. Many of these original ideas were based on simple exchange or production models that suggested that free trade would be in everyone’s best interests and surely in the national interest. During the nineteenth and twentieth centuries, however, a series of objections were raised suggesting that free trade was not in everyone’s interest and perhaps was not even in the national interest. The most prominent of these arguments included the infant industry argument, the terms of trade argument, arguments concerning income redistribution, and more recently, strategic trade policy arguments. Although each of these arguments might be thought of as weakening the case for free trade, instead, each argument brought forth a series of counterarguments that have acted to reassert the position of free trade as a favored policy despite these objections. The most important of these counterarguments include the potential for retaliation, the theory of the second best, the likelihood of incomplete or imperfect information, and the presence of lobbying in a democratic system.

What remains today is a modern, sophisticated argument in support of free trade among nations. It is an argument that recognizes that there are numerous exceptions to the notion that free trade is in everyone’s best interests. The modern case for free trade does not contend, however, that these exceptions are invalid or illogical. Rather, it argues that each exception supporting government intervention in the form of a trade policy brings with it additional implementation problems that are likely to make the policy impractical.

Before presenting the modern argument, however, it is worth deflecting some of the criticisms that are sometimes leveled against the economic theory of free trade. For example, the modern argument for free trade is not based on a simplistic view that everyone benefits from free trade. Indeed, trade theory, and experience in the real world, teaches us that free trade, or trade liberalization, is likely to generate losers as well as winners.

The modern argument for free trade is not based on unrealistic assumptions that lead to unrealistic conclusions. Although it is true that many assumptions contained within any given trade model do not accurately reflect many realistic features of the world, the modern argument for free trade is not based on the results from any one model. Instead, the argument is based on a collection of results from numerous trade models, which are interpreted in reference to realistic situations. If one considers the collection of all trade models jointly, it is much more difficult to contend that they miss realistic features of the world. Trade theory (as a collection of models) does consider imperfectly competitive markets, dynamic effects of trade, externalities in production and consumption, imperfect information, joint production, and many other realistic features. Although many of these features are absent in any one model, they are not absent from the joint collection of models, and it is this “extended model” that establishes the argument for free trade. Ideally, we would create a supermodel of the world economy that simultaneously incorporates all realistic features of the world and avoids what are often called “simplifying assumptions.” Unfortunately, this is not a realistic possibility. As anyone who has studied models of the economy knows, even models that are very simple in structure can be extremely difficult to comprehend, much less solve. As a result, we are forced to “interpret” the results of simple models as we apply them to the complex real world.

Key Takeaway

  • The modern support for free trade by most economists is based on a collection of results from a collection of models that incorporate many realistic features of the world into the analysis.

Jeopardy Questions . As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

  • The statement suggested by Paul Krugman as being an element of the economist’s creed—if ever there were such a thing.
  • This is who will benefit from free trade according to a simplistic view held by some free trade advocates.
  • This is what causes unrealistic conclusions in trade theory according to some free trade opponents.
  • The conclusions of one model of international trade or many models of international trade are best used to make trade policy prescriptions.

11.2 Economic Efficiency Effects of Free Trade

  • Learn the major source of support for free trade across a variety of trade models.

The main source of support for free trade lies in the positive production and consumption efficiency effects. In every model of trade, there is an improvement in aggregate production and consumption efficiency when an economy moves from autarky to free trade. This is equivalent to saying that there is an increase in national welfare. This result was demonstrated in the Ricardian model, the immobile factor model, the specific factor model, the Heckscher-Ohlin model, the simple economies-of-scale model, and the monopolistic competition model. The result can also be shown if there are differences in demand between countries. Each of these models shows that a country is likely to have greater national output and superior choices available in consumption as a result of free trade.

Production Efficiency

Improvements in production efficiency mean that countries can produce more goods and services with the same amount of resources. In other words, productivity increases for the given resource endowments available for use in production.

In order to achieve production efficiency improvements, resources must be shifted between industries within the economy. This means that some industries must expand while others contract. Exactly which industries expand and contract will depend on the underlying stimulus or basis for trade. Different trade models emphasize different stimuli for trade. For example, the Ricardian model emphasizes technological differences between countries as the basis for trade, the factor proportions model emphasizes differences in endowments, and so on. In the real world, it is likely that each of these stimuli plays some role in inducing the trade patterns that are observed.

Thus as trade opens, either the country specializes in the products in which it has a comparative technological advantage, or production is shifted to industries that use the country’s relatively abundant factors most intensively, or production is shifted to products in which the country has relatively less demand compared with the rest of the world, or production shifts to products that exhibit economies of scale in production.

If production shifts occur for any of these reasons, or for some combination of these reasons, then trade models suggest that total production would rise. This would be reflected empirically in an increase in the country’s gross domestic product (GDP). This means that free trade would cause an increase in the level of the country’s national output and income.

Consumption Efficiency

Consumption efficiency improvements arise for an individual when changes in the relative prices of goods and services allow the consumer to achieve a higher level of utility. Since the change in prices alters the choices a consumer has, we can say that consumption efficiency improvements imply that more satisfying choices become available. When multiple varieties of goods are available in a product category, as in the monopolistic competition model, then consumption efficiency improvements can mean that the consumer is able to consume greater varieties or is able to purchase a variety that is closer to his ideal.

Although improvements in consumption efficiency are easy to describe for an individual consumer, it is much more difficult to describe consumption efficiency conceptually for the aggregate economy. Nevertheless, when aggregate indifference curves are used to describe the gains from trade, it is possible to portray an aggregate consumption efficiency improvement. One must be careful to interpret this properly, though. The use of an aggregate indifference curve requires the assumptions that (1) all consumers have identical preferences and (2) there is no redistribution of income as a result of the changes in the economy. We have seen, however, that in most trade models income redistribution will occur as an economy moves to free trade, and it may be impossible to redistribute afterward. It is also likely that individuals have different preferences for goods, which also weakens the results using aggregate indifference curves.

Key Takeaways

  • The main sources of support for free trade are the positive production and consumption efficiency effects that arise in numerous models when countries trade freely.
  • Production efficiency improvements mean that countries produce more goods and services with the same amount of resources.
  • Consumption efficiency improvements mean that countries consume a more satisfying mix of goods and services.
  • The term often used as a synonym for an improvement in economic efficiency.
  • The type of efficiency improvement in which productivity rises for the given resource endowments available for use in production.
  • The type of efficiency improvement relating to consumer choice adjustments in response to a policy change.
  • The enhancement of this is what many economic models show will arise by moving to free trade.

11.3 Free Trade and the Distribution of Income

Learning objectives.

  • Recognize that a movement to free trade will cause a redistribution of income within the country.
  • Understand how compensation can relieve the problems caused by income redistribution.

A valid criticism of the case for free trade involves the issue of income distribution. Although most trade models suggest that aggregate economic efficiency is raised with free trade, these same models do not indicate that every individual in the economy will share in the benefits. Indeed, most trade models demonstrate that movements to free trade will cause a redistribution of income between individuals within the economy. In other words, some individuals will gain from free trade while others will lose. This was seen in the immobile factor model, the specific factor model, the Heckscher-Ohlin model, and the partial equilibrium analysis of trade liberalization.

There have been two general responses by economists concerning the income distribution issue. Some have argued that the objective of economics is solely to determine the most efficient policy choices. Introductory textbooks often suggest that the objective of the economics discipline is to determine how to allocate scarce resources toward production and consumption. Economists describe an allocation as “optimal” when it achieves the maximum level of aggregate economic efficiency. Put in these terms, economic analysis is “positive” in nature. Positive economics refers to studies that seek to answer questions pertaining to how things work in the economy and the subsequent effects. Positive economic analysis does not intend to explain what “should” be done. Issues pertaining to income distribution are commonly thought of as “normative” in nature, in that the concern is often over what the distribution “should” be. If we apply this reasoning to international trade, then, issues such as the appropriate income distribution are beyond the boundaries of the discipline and should be left to policymakers, government officials, or perhaps philosophers to determine.

Perhaps a more common response by economists concerning the income distribution issue is to invoke the compensation principle. A substantial amount of work by economists has been done to show that because free trade causes an increase in economic efficiency, it is generally possible to redistribute income from the winners to the losers such that, in the end, every individual gains from trade. The basic reason this is possible is that because of the improvement in aggregate efficiency, the sum of the gains to the winners exceeds the sum of the losses to the losers. This implies that it is theoretically possible for the potential winners from free trade to bribe the losers and leave everyone better off as a result of free trade. This allows economists to argue that free trade, coupled with an appropriate compensation package, is preferable to some degree of protectionism.

One major practical problem with compensation, however, is the difficulty of implementing a workable compensation package. In order to achieve complete compensation, one must be able to identify not only who the likely winners and losers will be but also how much they will win and lose and when in time the gains and losses will accrue. Although this is relatively simple to do in the context of a single trade model, such as the Heckscher-Ohlin model, it would be virtually impossible to do in practice given the complexity of the real world. The real world consists of tens of thousands of different industries producing millions of products using thousands of different factors of production. The sources of trade are manifold, including differences in technology, endowments, and demands, as well as the presence of economies of scale. Each source of trade, in turn, stimulates a different pattern of income redistribution when trade liberalization occurs. In addition, the pattern of redistribution over time is likely to be affected by the degree of mobility of factors between industries as the adjustment to free trade occurs. This was seen in the context of simple trade models, from the immobile factor model to the specific factor model to the Heckscher-Ohlin model.

Even in the context of simple trade models, a workable compensation mechanism is difficult to specify. An obvious solution would seem to be for the government to use taxes and subsidies to facilitate compensation. For example, the government could place taxes on those who would gain from free trade (or trade liberalization) and provide subsidies to those who would lose. However, if this were implemented in the context of many trade models, then the taxes and subsidies would change the production and consumption choices made in the economy and would act to reduce or eliminate the efficiency gains from free trade. The government taxes and subsidies, in this case, represent a policy-imposed distortion that, by itself, reduces aggregate economic efficiency. If the compensation package reduces efficiency more than the movement to free trade enhances efficiency, then it is possible for the nation to be worse off in free trade when combined with a tax/subsidy redistribution scheme. Dixit and Norman (1980) showed that under some conditions it is possible to specify a tax and subsidy policy that would guarantee an increase in aggregate economic efficiency with free trade. See A. Dixit and V. Norman, Theory of International Trade: A Dual General Equilibrium Approach (Cambridge: Cambridge University Press, 1980). The simple way to eliminate this problem, conceptually, is to suggest that the redistribution take place as a “lump-sum” redistribution. A lump-sum redistribution A redistribution of income that takes place after the free trade equilibrium is reached—that is, after all production and consumption decisions are made but before the actual consumption takes place. is one that takes place after the free trade equilibrium is reached—that is, after all production and consumption decisions are made but before the actual consumption takes place. Then, as if in the middle of the night when all are asleep, goods are taken away from those who have gained from free trade and left at the doors of those who had lost. Lump-sum redistributions are analogous to Robin Hood stealing from the rich and giving to the poor. As long as this redistribution takes place after the consumption choices have been made and without anyone expecting a redistribution to occur, then the aggregate efficiency improvements from free trade are still realized. Of course, although lump-sum redistributions are a clever conceptual or theoretical way to “have your cake and eat it too,” it is not practical or workable in the real world.

This implies that although compensation can solve the problem of income redistribution at the theoretical level, it is unlikely that it will ever solve the problem in the real world. Although some of the major gains and losses from free trade may be identifiable and quantifiable, it is unlikely that analysts would ever be able to identify all who would gain and lose in order to provide compensation and assure that everyone benefits. This means that free trade is extremely likely to cause uncompensated losses to some individuals in the economy. To the extent that these individuals expect these losses and can measure their expected value (accurately or not), then there will also likely be continued resistance to free trade and trade liberalization. This resistance is perfectly valid. After all, trade liberalization involves a government action that will cause injury to some individuals for which they do not expect to be adequately compensated. Furthermore, the economic efficiency argument will not go very far to appease these groups. Would you accept the argument that your expected losses are justifiable because others will gain more than you lose?

One final argument concerning the compensation issue is that compensation to the losers may not even be justifiable. This argument begins by noting that those who would lose from free trade are the same groups who had gained from protectionism. Past protectionist actions represent the implementation of government policies that had generated benefits to certain selected groups in the economy. When trade liberalization occurs, then, rather than suggesting that some individuals lose, perhaps it is more accurate to argue that the special benefits are being eliminated for those groups. On the other hand, those groups that benefit from free trade are the same ones that had suffered losses under the previous regime of protectionism. Thus their gains from trade can be interpreted as the elimination of previous losses. Furthermore, since the previous protectionist actions were likely to have been long lasting, one could even argue that the losers from protection (who would gain from free trade) deserve to be compensated for the sum total of their past losses. This would imply that upon moving to free trade, a redistribution ought to be made not from the winners in trade to the losers but from the losers in trade to the winners. Only in this way could one make up for the transgressions of the past. As before, though, identifying who lost and who gained and by how much would be virtually impossible to achieve, thus making this compensation scheme equally unworkable.

  • One major problem with movements to free trade is the redistribution of income described in many trade models. This means that although some individuals will benefit from free trade, many others will lose.
  • One way to deflect the redistribution concern is to argue that economic analysis provides the positive results of trade policies and is not intended to answer the normative questions of what should be done.
  • Another way to deflect the concern about income redistribution is to support compensation from the winners to the losers to assure that all parties benefit from free trade.
  • Because compensation requires an enormous amount of information about who wins and loses from trade, how much they win and lose, and when they win and lose, it is impractical to impossible to completely compensate the losers from free trade in a real-world setting.
  • A principle that, if applied in practice, could eliminate the negative impacts of income redistribution that may arise with free trade.
  • This is what many trade models show will happen to national income because of trade liberalization.
  • This type of compensation can avoid affecting consumption and production decisions.
  • The compensation using these two government policies is likely to affect production and consumption decisions.
  • The name of the mythical character best associated with lump-sum compensation.
  • Of a little or a lot , this is how much information the government needs to make compensation effective.

11.4 The Case for Selected Protection

  • Identify the cases in which the implementation of selected protectionism, targeted at particular industries with particular goals in mind, could raise national welfare.

An argument for selected protection A trade policy that is appropriately selected so as to raise national welfare in a market containing market imperfections or distortions. arises in the presence of imperfectly competitive markets, market distortions, or both. In these cases, it is often possible to show that an appropriately targeted trade policy (selected protection) can raise aggregate economic efficiency. In other words, free trade need not always be the best policy choice when the objective is to maximize national welfare. Numerous examples found in the trade literature demonstrate that selected protectionism applied under certain circumstances can raise national welfare. These results are in contrast with the standard trade models, which show that free trade is the best policy to maximize economic efficiency. The reason for the conflict is that the standard trade models, in most cases, explicitly assume that markets are perfectly competitive and implicitly assume there are no market distortions.

This general criticism of the standard case for free trade begins by noting that the real world is replete with examples of market imperfections and distortions. These include the presence of externalities both static and dynamic, both positive and negative, and in both production and consumption; markets in which production takes place with monopolistic or oligopolistic firms making positive profits; markets that do not clear, as when unemployment arises; the presence of public goods; the presence of imperfect or asymmetric information; the presence of distorting government policies and regulations; and the presence of national market power in international markets. When these features are included in trade models, it is relatively easy to identify trade policies that can sufficiently correct the market imperfection or distortion so as to raise aggregate efficiency.

For example, an optimal tariff or optimal quota set by a country that is large in an international import market can allow the nation to take advantage of its monopsony power in trade and cause an increase in national welfare. Similarly, an optimal export tax or voluntary export restraint (VER) set by a large country in an international export market will allow it to take advantage of its monopoly power in trade and generate an increase in welfare. This argument for protection is known as the “terms of trade argument.”

A tariff applied to protect an import-competing industry from a surge in foreign imports may reduce or eliminate the impending unemployment in the industry. If the cost of unemployment to the affected workers is greater than the standard net national welfare effect of the tariff, then the tariff may improve national welfare.

A tariff used to restrict imports of goods from more-efficient foreign firms may sufficiently stimulate learning effects within an industry to cause an increase in productivity that, in time, may allow the domestic firms to compete with foreign firms—even without continued protection. These learning effects—in organizational methods, in management techniques, in cost-cutting procedures—might in turn spill over to other sectors in the economy, stimulating efficiency improvements in many other industries. All together, the infant industry protection may cause a substantial increase in the growth of the gross domestic product (GDP) relative to what might have occurred otherwise and thus act to improve national welfare.

A tariff used to stimulate domestic production of a high-technology good might spill over to the research and development division and cause more timely innovations in next-generation products. If these firms turn into industry leaders in these next-generation products, then they will enjoy the near-monopoly profits that accrue to the original innovators. As long as these long-term profits outweigh the short-term costs of protection, national welfare may rise.

An import tariff applied against a foreign monopoly supplying the domestic market can effectively shift profits from the foreign firm to the domestic government. Despite the resulting increase in the domestic price, national welfare may still rise. Also, export subsidies provided to domestic firms that are competing with foreign firms in an oligopoly market may raise domestic firms’ profits by more than the cost of the subsidy, especially if profits can be shifted away from the foreign firms. These two cases are examples of a strategic trade policy.

If pollution, a negative production externality, caused by a domestic import-competing industry is less than the pollution caused by firms in the rest of the world, then a tariff that restricts imports may sufficiently raise production by the domestic firm relative to foreign firms and cause a reduction in world pollution. If the benefits that accrue due to reduced worldwide pollution are greater than the standard cost of protection, then the tariff will raise world welfare.

Alternatively, if pollution is caused by a domestic export industry, then an export tax would reduce domestic production along with the domestic pollution that the production causes. Although the export tax may act to raise production and pollution in the rest of the world, as long as the domestic benefits from the pollution reduction outweigh the costs of the export tax, domestic national welfare may rise.

If certain domestically produced high-technology goods could wind up in the hands of countries that are our potential enemies, and if these goods would allow those countries to use the products in a way that undermines our national security, then the government could be justified to impose an export prohibition on those goods to those countries. In this case, if free trade were allowed in these products, it could reduce the provision of a public good, namely, national security. As long as the improvement in national security outweighs the cost of the export prohibition, national welfare would rise.

These are just some of the examples (many more are conceivable) in which the implementation of selected protectionism, targeted at particular industries with particular goals in mind, could act to raise national welfare, or aggregate economic efficiency. Each of these arguments is perfectly valid conceptually. Each case arises because of an assumption that some type of market imperfection or market distortion is present in the economy. In each case, national welfare is enhanced because the trade policy reduces or eliminates the negative effects caused by the presence of the imperfection or distortion and because the reduction in these effects can outweigh the standard efficiency losses caused by the trade policy.

It would seem from these examples that a compelling case can certainly be made in support of selected protectionism. Indeed, Paul Krugman (1987) wrote that “the case for free trade is currently more in doubt than at any time since the 1817 publication of [David] Ricardo’s Principles of Political Economy .” See Paul Krugman, “Is Free Trade Passe?” Journal of Economic Perspectives 1, no. 2 (1987): 131–44. Many of the arguments showing the potential for welfare-improving trade policies described above have been known for more than a century. The infant industry argument can be traced in the literature as far back as a century before Adam Smith argued against it in The Wealth of Nations (1776). The argument was later supported by writers such as Friedrich List in The National System of Political Economy (1841) See Friedrich List, The National System of Political Economy , McMaster University Archive for the History of Economic Thought, http://socserv2.socsci.mcmaster.ca:80/~econ/ugcm/3ll3/list/index.html . and John Stuart Mill in his Principles of Political Economy (1848). See John Stuart Mill, Principles of Political Economy , McMaster University Archive for the History of Economic Thought, http://socserv2.socsci.mcmaster.ca:80/~econ/ugcm/3ll3/mill/index.html . The terms of trade argument was established by Robert Torrens in 1844 in The Budget: On Commercial and Colonial Policy . See Robert Torrens, The Budget: On Commercial and Colonial Policy (London: Smith, Elder, 1844). Frank Graham, in his 1923 article “Some Aspects of Protection Further Considered,” noted the possibility that free trade would reduce welfare if there were variable returns to scale in production. See Frank Graham, “Some Aspects of Protection Further Considered,” The Quarterly Journal of Economics 37, no. 2 (February 1923): 199–227. During the 1950s and 1960s, market distortions such as factor-market imperfections and externality effects were introduced and studied in the context of trade models. The strategic trade policy arguments are some of the more recent formalizations showing how market imperfections can lead to welfare-improving trade policies. Despite this long history, economists have generally continued to believe that free trade is the best policy choice. The main reason for this almost unswerving support for free trade is because as arguments supporting selected protectionism were developed, equally if not more compelling counterarguments were also developed.

  • In the presence of market imperfections or distortions, selected protection can often raise a country’s national welfare.
  • Because real-world markets are replete with market imperfections and distortions, free trade is not the optimal policy to improve national welfare.
  • The term used to describe market conditions that open up the possibility for welfare-improving trade policies.
  • The term used to describe a market equilibrium in which market imperfections or distortions are present.
  • Of very many or very few , this is the amount of market imperfections likely to be present in modern national economies.
  • Of true or false , a tariff can raise a nation’s welfare when it is a large importing country.
  • Of true or false , a tariff can raise national welfare in the presence of an infant industry.
  • Of true or false , a tariff can raise national welfare if all markets are perfectly competitive and if there are no market imperfections or distortions.

Identify a trade policy that can potentially raise national welfare in each of the following situations.

  • When a foreign monopoly supplies the domestic market with no import-competing producers.
  • When a domestic negative production externality is caused by a domestic industry that exports a portion of its production to the rest of the world.
  • When a positive production externality is caused by a domestic industry that competes with imports.
  • When a domestic negative consumption externality is caused by domestic consumers in a market in which the country exports a portion of its production to the rest of the world.
  • When a country is large in an export market.

11.5 The Economic Case against Selected Protection

  • Learn the valid counterarguments to the use of selected protection when market imperfections or distortions are present.

The economic case against selected protectionism does not argue that the reasons for protection are conceptually or theoretically invalid. Indeed, there is general acceptance among economists that free trade is probably not the best policy in terms of maximizing economic efficiency in the real world. Instead, the counterarguments to selected protectionism are based on four broad themes: (1) potential reactions by others in response to one country’s protection, (2) the likely presence of superior policies to raise economic efficiency relative to a trade policy, (3) information deficiencies that can inhibit the implementation of appropriate policies, and (4) problems associated with lobbying within democratic political systems. We shall consider each of these issues in turn.

The Potential for Retaliation

One of the problems with using some types of selected protection arises because of the possibility of retaliation by other countries using similar policies. For example, it was shown that whenever a large country in the international market applies a policy that restricts exports or imports (optimally), its national welfare will rise. This is the terms of trade argument supporting protection. However, it was also shown that the use of an optimal trade policy in this context always reduces national welfare for the country’s trade partners. Thus the use of an optimal tariff, export tax, import quota, or voluntary export restraint (VER) is a “beggar-thy-neighbor” policy—one country benefits only by harming others. For this reason, it seems reasonable, if not likely, that the countries negatively affected by the use of such policies, if they are also large in international markets, would retaliate by setting optimal trade policies restricting their exports and imports to the rest of the world. In this way, the retaliating country could generate benefits for itself in some markets to compensate for its losses in others.

However, the final outcome after retaliation occurs is very likely to be a reduction in national welfare for both countries. Harry Johnson (1953) showed the possibility that one country might still improve its national welfare even after a trade war (i.e., optimal protection followed by optimal retaliation); however, this seems an unlikely outcome in real-world cases. Besides, even if one country did gain, it would still do so at the expense of its trade partners, which remains an unsavory result. See Harry G. Johnson, “Optimum Tariffs and Retaliation,” Review of Economic Studies 21, no. 2 (1953): 142–53. This occurs because each trade policy action results in a decline in world economic efficiency. The aggregate losses that accrue to one country as a result of the other’s trade policy will always exceed the benefits that accrue to the policy-setting country. When every large country sets optimal trade policies to improve its terms of trade, the subsequent reduction in world efficiency dominates any benefits that accrue due to its unilateral actions.

What this implies is that although a trade policy can be used to improve a nation’s terms of trade and raise national welfare, it is unlikely to raise welfare if other large countries retaliate and pursue the same policies. Furthermore, retaliation seems a likely response because maintenance of a free trade policy in light of your trade partner’s protection would only result in national aggregate efficiency losses. Indeed, Robert Torrens, the originator of the terms of trade argument, was convinced that a large country should maintain protective barriers to trade when its trade partners maintained similar policies. The case for unilateral free trade even when one’s trade partners use protective tariffs is only valid when a country is small in international markets.

Perhaps the best empirical support for this result is the experience of the world during the Great Depression of the 1930s. After the United States imposed the Smoot-Hawley Tariff Act of 1930, raising its tariffs to an average of 60 percent, approximately sixty countries retaliated with similar increases in their own tariff barriers. As a result, world trade in the 1930s fell to one-quarter of the level attained in the 1920s. Most economists agree that these tariff walls contributed to the length and severity of the economic depression. That experience also stimulated the design of the reciprocal trade liberalization efforts embodied in the General Agreement on Tariffs and Trade (GATT).

The issue of retaliation also arises in the context of strategic trade policies. In these cases, a trade policy can be used to shift profits from foreign firms to the domestic economy and raise domestic national welfare. The policies work in the presence of monopolistic or oligopolistic markets by raising the international market share for one’s own firms. The benefits to the policy-setting country arise only by reducing the profits of foreign firms and subsequently reducing those countries’ national welfare. One exception arises in the model by J. Eaton and G. Grossman, “Optimal Trade and Industrial Policy under Oligopoly,” Quarterly Journal of Economics 101, no. 2 (1986): 383–406. Thus one country’s gains are other country’s losses, and strategic trade policies can rightfully be called beggar-thy-neighbor policies. Since foreign firms would lose from our country’s policies, as before, it is reasonable to expect retaliation by the foreign governments. However, because these policies essentially just reallocate resources among profit-making firms internationally, it is unlikely for a strategic trade policy to cause an improvement in world economic efficiency. This implies that if the foreign country did indeed retaliate, the likely result would be reductions in national welfare for both countries.

Retaliations would only result in losses for both countries when the original trade policy does not raise world economic efficiency. However, some of the justifications for protection that arise in the presence of market imperfections or distortions may actually raise world economic efficiency because the policy acts to eliminate some of the inefficiencies caused by the distortions. In these cases, retaliation would not pose the same problems. There are other problems, though.

The Theory of the Second Best

One of the more compelling counterarguments to potentially welfare-improving trade policies relies on the theory of the second best. This theory shows that when private markets have market imperfections or distortions present, it is possible to add another (carefully designed) distortion, such as a trade policy, and improve economic efficiency both domestically and worldwide. The reason for this outcome is that the second distortion can correct the inefficiencies of the first distortion by more than the inefficiencies caused by the imposed policy. In economist’s jargon, the original distorted economy is at a second-best equilibrium. In this case, the optimal trade policy derived for an undistorted economy (most likely free trade) no longer remains optimal. In other words, policies that would reduce national welfare in the absence of distortions can now improve welfare when there are other distortions present.

This argument, then, begins by accepting that trade policies (protection) can be welfare improving. The problem with using trade policies, however, is that in most instances they are a second-best policy choice. In other words, there will likely be another policy—a domestic policy—that could improve national welfare at a lower cost than any trade policy. The domestic policy that dominates would be called a first-best policy. The general rule used to identify first-best policies is to use that policy that “most directly” attacks the market imperfection or distortion. It turns out that these are generally domestic production, consumption, or factor taxes or subsidies rather than trade policies. The only exceptions occur when a country is large in international markets or when trade goods affect the provision of a public good such as national security.

Thus the counterargument to selected protection based on the theory of the second best is that first-best rather than second-best policies should be chosen to correct market imperfections or distortions.

Since trade policies are generally second best while purely domestic policies are generally first best, governments should not use trade policies to correct market imperfections or distortions. Note that this argument does not contend that distortions or imperfections do not exist, nor does it assume that trade policies could not improve economic efficiency in their presence. Instead, the argument contends that governments should use the most efficient (least costly) method to reduce inefficiencies caused by the distortions or imperfections, and this is unlikely to be a trade policy.

Note that this counterargument to protection is also effective when the issue is income distribution. Recall that one reason countries may use trade policies is to achieve a more satisfying income distribution (or to avoid an unsatisfactory distribution). However, it is unlikely that trade policies would be the most effective method to eliminate the problem of an unsatisfactory income distribution. Instead, there will likely be a purely domestic policy that could improve income distribution more efficiently.

In the cases where a trade policy is first best, as when a country is large in international markets, this argument does not act as a counterargument to protection. However, retaliation remains a valid counterargument in many of these instances.

Information Deficiencies

The next counterargument against selected protectionism concerns the likely informational constraints faced by governments. In order to effectively provide infant industry protection, or to eliminate negative externality effects, stimulate positive externality effects, or shift foreign profits to the domestic economy, the government would need substantial information about the firms in the market, their likely cost structures, supply and demand elasticities indicating the effects on supply and demand as a result of price changes, the likely response by foreign governments, and much more. Bear in mind that although it was shown that selected protection could generate an increase in national welfare, it does not follow that any protection would necessarily improve national welfare. The information requirements arise at each stage of the government’s decision-making process.

First, the government would need to identify which industries possess the appropriate characteristics. For example, in the case of infant industries, the government would need to identify which industries possess the positive learning externalities needed to make the protection work. Presumably, some industries would generate these effects, while others would not. In the case of potential unemployment in a market, the government would need to identify in which industries facing a surge of imports the factor immobility was relatively high. In the case of a strategic trade policy, the government would have to identify which industries are oligopolistic and exhibit the potential to shift foreign profits toward the domestic economy.

Second, the government would need to determine the appropriate trade policy to use in each situation and set the tariff or subsidy at the appropriate level. Although this is fairly straightforward in a simple theoretical model, it may be virtually impossible to do correctly in a real-world situation. Consider the case of an infant industry. If the government identified an industry with dynamic intertemporal learning effects, it would then need to measure how the level of production would influence the size of the learning effects in all periods in the future. It would also need to know how various tariff levels would affect the level of domestic production. To answer this requires information about domestic and foreign supply and demand elasticities. Of course, estimates of past elasticities may not work well, especially if technological advances or preference changes occur in the future. All of this information is needed to determine the appropriate level of protection to grant as well as a timetable for tariff reduction. If the tariff is set too low or for too short a time, the firms might not be sufficiently protected to induce adequate production levels and stimulate the required learning effects. If the tariff is set too high or for too long a period, then the firms might become lazy. Efficiency improvements might not be made and the learning effects might be slow in coming. In this case, the production and consumption efficiency losses from the tariff could outweigh the benefits accruing due to learning.

This same information deficiency problem arises in every example of selected protection. Of course, the government would not need pinpoint accuracy to assure a positive welfare outcome. As demonstrated in the case of optimal tariffs, there would be a range of tariff levels that would raise national welfare above the level attained in free trade. A similar range of welfare-improving protection levels would also hold in all the other cases of selected protection.

However, there is one other informational constraint that is even ignored in most economic analyses of trade policies. This problem arises when there are multiple distortions or imperfections present in the economy simultaneously (exactly what we would expect to see in the real world). Most trade policy analyses incorporate one economic distortion into a model and then analyze what the optimal trade policy would be in that context. Implicitly, this assumes either that there are no other distortions in the economy or that the market in which the trade policy is being considered is too small to have any external effects on other markets. The first assumption is clearly not satisfied in the world, while the second is probably not valid for many large industries.

The following example suggests the nature of the informational problem. Suppose there are two industries that are linked together because their products are substitutable in consumption to some degree. Suppose one of these industries exhibits a positive dynamic learning externality and is having difficulty competing with foreign imports (i.e., it is an infant industry). Assume the other industry heavily pollutes the domestic water and air (i.e., it exhibits a negative production externality). Now suppose the government decides to protect the infant industry with an import tariff. This action would, of course, stimulate domestic production of the good and also stimulate the positive learning effects for the economy. However, the domestic price of this good would rise, reducing domestic consumption. These higher prices would force consumers to substitute other products in consumption. Since the other industry’s products are assumed to be substitutable, demand for that industry’s goods will rise. The increase in demand would stimulate production of that good and, because of its negative externality, cause more pollution to the domestic environment. If the negative effects to the economy from additional pollution are greater than the positive learning effects, then the infant industry protection could reduce rather than improve national welfare.

The point of this example, however, is to demonstrate that in the presence of multiple distortions or imperfections in interconnected markets (i.e., in a general equilibrium model), the determination of optimal policies requires that one consider the intermarket effects. The optimal infant industry tariff must take into account the effects of the tariff on the polluting industry. Similarly, if the government wants to set an optimal environmental policy, it would need to account for the effects of the policy on the industry with the learning externality.

This simple example suggests a much more serious informational problem for the government. If the real economy has numerous market imperfections and distortions spread out among numerous industries that are interconnected through factor or goods market competition, then to determine the true optimal set of policies that would correct or reduce all the imperfections and distortions simultaneously would require the solution to a dynamic general equilibrium model that accurately describes the real economy not only today but also in all periods in the future. This type of model, or its solution, is simply not achievable today with any high degree of accuracy. Given the complexity, it seems unlikely that we would ever be capable of producing such a model.

The implication of this informational problem is that trade policy will always be like a shot in the dark. There is absolutely no way of knowing with a high degree of accuracy whether any policy will improve economic efficiency. This represents a serious blow to the case for government intervention in the form of trade policies. If the intention of government is to set trade policies that will improve economic efficiency, then since it is impossible to know whether any policy would actually achieve that goal, it seems prudent to avoid the use of any such policy. Of course, the goal of government may not be to enhance economic efficiency, and that brings us to the last counterargument against selected protection.

Political Economy Issues: The Problem with Democratic Processes

In democratic societies, government representatives and officials are meant to carry out the wishes of the general public. As a result, decisions by the government are influenced by the people they represent. Indeed, one of the reasons “free speech” is so important in democratic societies is to assure that individuals can make their attitudes toward government policies known without fear of reproach. Individuals must be free to inform the government of which policies they approve and of which they disapprove if the government is truly to be a representative of the people. The process by which individuals inform the government of their preferred policies is generally known as lobbying.

In a sense, one could argue that lobbying can help eliminate some of the informational deficiencies faced by governments. After all, much of the information the government needs to make optimal policies is likely to be better known by its constituent firms and consumers. Lobbying offers a process through which information can be passed from those directly involved in production and consumption activities to the officials who determine policies. However, this process may turn out to be more of a problem than a solution.

One of the results of trade theory is that the implementation of trade policies will likely affect income distribution. In other words, all trade policies will generate income benefits to some groups of individuals and income losses to other groups. Another outcome, though, is that the benefits of protection would likely be concentrated—that is, the benefits would accrue to a relatively small group. The losses from protection, however, would likely be dispersed among a large group of individuals.

This outcome was seen clearly in the partial equilibrium analysis of a tariff. When a tariff is implemented, the beneficiaries would be the import-competing firms, which would face less competition for their product, and the government, which collects tariff revenue. The losses would accrue to the thousands or millions of consumers of the product in the domestic economy.

For example, consider a tariff on textile imports being considered by the government of a small, perfectly competitive economy. Theory shows that the sum of the benefits to the government and the firms will be exceeded by the losses to consumers. In other words, national welfare would fall. Suppose the beneficiaries of protection are one hundred domestic textile firms that would each earn an additional $1 million in profit as a result of the tariff. Suppose the government would earn $50 million in additional tariff revenue. Thus the total benefits from the tariff would be $150 million. Suppose consumers as a group would lose $200 million, implying a net loss to the economy of $50 million. However, suppose there are one hundred million consumers of the products. That implies that each individual consumer would lose only $2.

Now, if the government bases its decision for protection on input from its constituents, then it is very likely that protection will be granted even though it is not in the nation’s best interest. The reason is that textile firms would have an enormous incentive to lobby government officials in support of the policy. If each firm expects an extra $1 million, it would make sense for the firms to hire a lobbying firm to help make their case before the government. The arguments to be used, of course, are (1) the industry will decline and be forced to lay off workers without protection, thus protection will create jobs; (2) the government will earn additional revenues that can be used for important social programs; and (3) the tax is on foreigners and is unlikely to affect domestic consumers (number 3 isn’t correct, of course, but the argument is often used anyway). Consumers, on the other hand, have very little individual incentive to oppose the tariff. Even writing a letter to your representative is unlikely to be worth the $2 potential gain. Plus, consumers would probably hear (if they hear anything at all) that the policy will create some jobs and may not affect the domestic price much anyway (after all, the tax is on foreigners).

The implication of this problem is that the lobbying process may not accurately relate to the government the relative costs and benefits that will arise due to the implementation of a trade policy. As a result, the government would likely implement policies that are in the special interests of those groups who stand to accrue the concentrated benefits from protection, even though the policy may generate net losses to the economy as a whole. Thus by maintaining a policy of free trade, an economy could avoid national efficiency losses that could arise with lobbying in a democratic system.

  • Selected protection may fail to raise national welfare when foreign country retaliations occur. This is a potential problem when many countries are large in international markets.
  • Selected protection with a trade policy is typically second best. A purely domestic policy to correct the market imperfection is often the better, or first-best, policy.
  • Selected protection requires detailed information in order to set the policy at a level that will assure an improvement in national welfare. Because the necessary information is often lacking, getting selected protection right may be impossible.
  • Selected protection can be captured by special interests in the lobbying process in representative democracies, thereby making it less likely that maximum national welfare will be achieved.
  • The term used to describe a potentially welfare-reducing reaction to beggar-thy-neighbor trade policies.
  • The term used to describe the lowest-cost policy action that corrects for market distortions or imperfections.
  • The often overlooked deficiencies that affect the ability of government to set effective policies.
  • The term used to describe the process by which individuals inform the government of their preferred policies.
  • Economists applying the theory of the second best would argue that free trade is appropriate in spite of market imperfections because these types of policies are usually first best.

11.6 Free Trade as the “Pragmatically Optimal” Policy Choice

  • Understand the modern argument for free trade as a “pragmatically optimal” policy choice.

In summary, the economic argument in support of free trade is a sophisticated argument that is based on the interpretation of results from the full collection of trade theories developed over the past two or three centuries. These theories, taken as a group, do not show that free trade is the best policy for every individual in all situations. Instead, the theories show that there are valid arguments supporting both free trade and protectionism. To choose between the two requires a careful assessment of the pros and cons of each policy regime.

The argument for free trade presented here accepts the notion that free trade may not always be optimal in terms of maximizing economic efficiency. The argument also accepts that free trade may not generate the most preferred distribution of income. In theory, there are numerous cases in which selected protectionism can improve aggregate welfare or could establish a more equal distribution of income. Nevertheless, despite these theoretical possibilities, it remains unclear and perhaps unlikely that selected protectionism could achieve the intended results. First, in many instances, a trade policy is not the best way to achieve the intended improvement in economic efficiency, nor is it likely to be the most efficient way to achieve a more satisfactory distribution of income. Instead, purely domestic tax and subsidy policies dominate. Second, even when a trade policy is the best policy choice, the possibility of retaliations and the likelihood of informational deficiencies or distortions caused by the lobbying process are sufficiently large as to make the intended outcomes unknowable.

In addition, the process of information collection, lobbying, and policy implementation is a costly economic activity. Labor and capital resources are allocated by interest groups attempting to affect policies favorable to them. The government also must expend resources to gather information, to implement and administer policies, and to monitor the effectiveness of these policies. In the United States, the following agencies and groups devote at least some of their time to trade policy implementation: the Office of the United States Trade Representative, the International Trade Commission, the Department of Commerce, the Federal Trade Commission, the Department of Justice, the Congress, and the president, among others. One must wonder whether the cost of this bureaucracy, together with the cost to the private sector to influence the decisions of the government, is worth it, especially when the outcomes are virtually unknowable.

Thus the conclusion reached by many economists is that while free trade may not be “technically optimal,” it remains “pragmatically optimal.” That is, given our informational deficiencies and the other problems inherent in any system of selected protectionism, free trade remains the policy most likely to produce the highest level of economic efficiency attainable.

  • While free trade may not be “technically optimal,” it remains “pragmatically optimal”—that is, free trade remains the policy most likely to produce the highest level of economic efficiency that is practically attainable.

Jeopardy Question . As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

  • The term used to describe a policy that is relatively easy to implement and has strong positive characteristics but may not be best in all conceivable circumstances.

Understanding the Pros and Cons of Protectionism

  • U.S. Economy
  • Supply & Demand
  • Archaeology
  • B.S., Texas A&M University

Protectionism is a type of trade policy by which governments attempt to prevent or limit competition from other countries. While it may provide some short-term benefit, particularly in poor or developing nations, unlimited protectionism eventually harms the country’s ability to compete in international trade. This article examines the tools of protectionism, how they are applied in the real world, and the advantages and disadvantages of limiting free trade.

Key Takeaways: Protectionism

  • Protectionism is a government-imposed trade policy by which countries attempt to protect their industries and workers from foreign competition.
  • Protectionism is commonly implemented by the imposition of tariffs, quotas on import and exports, product standard, and government subsidies.
  • While it may be of temporary benefit in developing countries, total protectionism typically harms the country’s economy, industries, workers, and consumers.

Protectionism Definition

Protectionism is a defensive, often politically-motivated, policy intended to shield a country’s businesses, industries, and workers from foreign competition through the imposition of trade barriers such as tariffs and quotas on imported goods and services, along with other government regulations. Protectionism is considered to be the opposite of free trade, which is the total absence of government restrictions on trade. 

Historically, strict protectionism has been used mainly by newly developing countries as they build the industries necessary to compete internationally. While this so-called “infant industry” argument may promise brief, limited protection to the businesses and workers involved, it ultimately harms consumers by increasing the costs of imported essential goods, and workers by reducing trade overall.  

Protectionism Methods

Traditionally, governments employ four main methods of implementing protectionist policies: import tariffs, import quotas, product standards, and subsidies.

The most commonly applied protectionist practices, tariffs, also called “duties,” are taxes charged on specific imported goods. Since tariffs are paid by the importers, the price of imported goods in local markets is increased. The idea of tariffs is to make the imported product less attractive to consumers than the same locally produced product, thus protecting the local business and its workers.

One of the most famous tariffs is the Smoot-Hawley Tariff of 1930 . Initially intended to protect American farmers from the post- World War II influx of European agricultural imports, the bill eventually approved by Congress added high tariffs on many other imports. When European countries retaliated, the resulting trade war restricted global trade, harming the economies of all countries involved. In the United States, the Smoot-Hawley Tariff was considered an overly-protectionist measure that worsened the severity of the Great Depression .

Import Quotas

Trade quotas are “non-tariff” trade barriers that limit the number of a specific product that can be imported over a set period of time. Limiting the supply of a certain imported product, while increasing prices paid by consumers, allows local producers a chance to improve their position in the market by filling the unmet demand. Historically, industries like autos, steel, and consumer electronics have used trade quotas to protect domestic producers from foreign competition.

For example, since the early 1980s, the United States has imposed a quota on imported raw sugar and sugar-containing products. Since then, the world price of sugar has averaged from 5 to 13 cents per pound, while the price within the U.S. has ranged from 20 to 24 cents.

In contrast to import quotas, “production quotas” occur when governments limit the supply of a certain product in order to maintain a certain price point for that product. For example, the nations of the Organization of Petroleum Exporting Countries (OPEC) imposes a production quota on crude oil in order to maintain a favorable price for oil in the world market. When the OPEC nations reduce production, U.S. consumers see higher gasoline prices.

The most drastic and potentially inflammatory form of import quota, the “embargo” is a total prohibition against importing a certain product into a country. Historically, embargoes have had drastic impacts on consumers. For example, when OPEC proclaimed an oil embargo against nations it perceived as supporting Israel, the resulting 1973 oil crisis saw the average price of gasoline in the U.S. jump from 38.5 cents per gallon in May 1973 to 55.1 cents in June 1974. Some lawmakers called for nationwide gas rationing and President Richard Nixon asked gasoline stations not to sell gas on Saturday nights or Sundays.      

Product Standards

Product standards limit imports by imposing minimum safety and quality requirements for certain products. Product standards are typically based on concerns over product safety, material quality, environmental dangers, or improper labeling. For example, French cheese products made with raw, non-pasteurized milk, cannot be imported into the United States until they have been aged at least 60 days. While based on a concern for public health, the delay prevents some specialty French cheeses from being imported, thus providing local producers a better market for their own pasteurized versions.

Some product standards apply to both imported and domestically-produced products. For example, the U.S. Food and Drug Administration (FDA) limits the content of mercury in imported and domestically harvested fish sold for human consumption to one part per million.

Government Subsidies

Subsidies are direct payments or low-interest loans given by governments to local producers to help them compete in the global market. In general, subsidies lower production costs enabling producers to make a profit at lower price levels. For example, U.S. agricultural subsidies help American farmers supplement their income, while helping the government manage the supply of agricultural commodities, and control the cost of American farm products internationally. Additionally, carefully applied subsidies can protect local jobs and help local companies adjust to global market demands and pricing.

Protectionism vs. Free Trade

Free trade—the opposite of protectionism—is a policy of completely unrestricted trade between countries. Devoid of protectionist restrictions like tariffs or quotas, free trade allows goods to move freely across borders.

While both total protectionism and free trade have been tried in the past, the results were usually harmful. As a result, multilateral “ free trade agreements ,” or FTAs, such as the North American Free Trade Agreement (NAFTA) and the 160-nation World Trade Organization (WTO) have become common. In FTAs, the participating nations mutually agree on limited protectionist practices tariffs and quotas. Today, economists agree that FTAs has averted many potentially disastrous trade wars.

Protectionism Pros and Cons

In poor or emerging countries, strict protectionist policies like high tariffs and embargoes on imports can help their new industries grow by protecting them from foreign competition.

Protectionist policies also help create new jobs for local workers. Protected by tariffs and quotas, and bolstered by government subsidies, domestic industries are able to hire locally. However, the effect is typically temporary, actually reducing employment as other countries retaliate by imposing their own protectionist trade barriers.

On the negative side, the reality that protectionism hurts the economies of countries that employ it dates back to Adam Smith’s The Wealth of Nations , published in 1776. Eventually, protectionism weakens domestic industries. With no foreign competition, industries see no need for innovation. Their products soon decline in quality, while becoming more expensive than higher quality foreign alternatives.

In order to succeed, strict protectionism demands the unrealistic expectation that the protectionist country will be able to produce everything its people need or want. In this sense, protectionism is in direct opposition to the reality that a country’s economy will prosper only when its workers are free to specialize at what they do best rather than trying to make the country self-sufficient.

Sources and Further Reading

  • Irwin, Douglas (2017), " Peddling Protectionism: Smoot-Hawley and the Great Depression ," Princeton University Press.
  • Irwin, Douglas A., " Tariffs and Growth in Late Nineteenth-Century America ." World Economy. (2001-01-01). ISSN 1467-9701.
  • Hufbauer, Gary C., and Kimberly A. Elliott. " Measuring the Costs of Protectionism in the United States ." Institute for International Economics, 1994.
  • C. Feenstra, Robert; M. Taylor, Alan. " Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century ." National Bureau of Economic Research. ISBN: 978-0-226-03075-3
  • Irwin, Douglas A., " Free Trade Under Fire ," Princeton University Press, 2005.
  • What Is Free Trade? Definition, Theories, Pros, and Cons
  • The Economic Effect of Tariffs
  • The Protectionist Smoot-Hawley Tariff of 1930
  • Why Tariffs Are Preferable to Quotas
  • Regionalism: Definition and Examples
  • The Arguments Against Free Trade
  • What Is Globalization?
  • Product Dumping: A Danger to Foreign Markets
  • What Is an Embargo? Definition and Examples
  • The Tariff of Abominations of 1828
  • The Chicken Tax and Its Influence on the U.S. Auto Industry
  • History of the North American Free Trade Agreements
  • The Globalization of Capitalism
  • Henry Clay's American System of Economics
  • The International Monetary Fund
  • Examples of Sanctions in International Relations

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Analysis of Free Trade Versus Protectionism

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Published: Jun 9, 2021

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Works Cited

  • World Trade Organization. (n.d.). Understanding the WTO: What is the WTO? Retrieved from https://www.wto.org
  • Bhagwati, J. N. (2002). Free trade today. Princeton University Press.
  • Irwin, D. A. (2017). Clashing over commerce: A history of US trade policy. University of Chicago Press.
  • Rodriguez, F., & Rodrik, D. (2001). Trade policy and economic growth: A skeptic's guide to the cross-national evidence. In B. S. Bernanke & K. Rogoff (Eds.), NBER macroeconomics annual 2000 (pp. 261-338). MIT Press.
  • Baldwin, R., & Evenett, S. (2009). The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20. CEPR Policy Insight, 40.
  • Baldwin, R. (2016). The great convergence: Information technology and the new globalization. Harvard University Press.
  • Rodrik, D. (2018). Straight talk on trade: Ideas for a sane world economy. Princeton University Press.
  • Hufbauer, G. C., & Schott, J. J. (2005). NAFTA revisited: Achievements and challenges. Peterson Institute for International Economics.
  • Manova, K. (2013). Credit constraints, heterogeneous firms, and international trade. The Review of Economic Studies, 80(2), 711-744.
  • World Bank. (2019). World Development Indicators 2019. Retrieved from https://databank.worldbank.org/source/world-development-indicators

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essay on free trade vs protectionism

Protectionism and Free Trade System Essay

The available literature on global trade policies demonstrates that protectionism is the practice of countries to safeguard local industries and their labor force through the use of tariffs, quotas, subsidies, and other forms of administered protection intended to block or slow down the economic adjustments that otherwise would have to be made to deal with competing foreign products. This trade policy is different from the free trade system, which basically aims to achieve optimal production and consumption possibilities for citizens of all nations by dropping import barriers and tariffs, hence allowing foreign products and services to compete on a level playing ground with local products.

The protectionist trade policy is advantageous in that it encourages and facilitates the growth of new industries by protecting them from foreign competition, creates jobs for domestic workers, and stimulates country-level economic growth in the short-term period. On the other hand, the free trade system is advantageous in that it (1) prevents market imperfections by reducing or eliminating tariffs, quotas, subsidies, and regulations (2) reduces consumer prices, (3) fosters economic growth by rewarding risk-taking behavior through enhanced sales, profit margins and market share, (4) promotes innovation and competition, and (5) disseminates democratic values by ensuring that companies engaging in international trade abide by the terms of their contracts and other international obligations as suggested in the norms and values governing trade.

Lastly, the adoption of the free trade system is the best strategy for trade policy as it guarantees immense benefits for countries engaging in international trade. Specifically, this system provides a level playing ground for local products and services to compete with foreign products, hence not only availing customers with a broad range of choices but also ensuring that companies adopt innovative and efficient practices to remain competitive in the international arena. Additionally, unlike the protectionist system, the free trade system encourages economic freedom and fosters support for the rule of law.

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IvyPanda. (2021, January 26). Protectionism and Free Trade System. https://ivypanda.com/essays/protectionism-and-free-trade-system/

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IvyPanda . 2021. "Protectionism and Free Trade System." January 26, 2021. https://ivypanda.com/essays/protectionism-and-free-trade-system/.

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Making social science accessible

Trade: free trade v. protectionism

essay on free trade vs protectionism

05 Dec 2017

UK in the world

essay on free trade vs protectionism

The Citizens’ Assembly is looking at what kind of trade arrangement the UK should seek with the EU. The debates can get quite detailed and confusing. But there is also a big question of principle: is free trade a good thing at all?

Free trade vs protectionism: overview

One view says that we should make it as easy as possible for goods and services to move between countries. This approach is based on the argument that more trade makes us wealthier and is therefore a good thing. It is known as free trade.

Another approach says that we should restrict trade. We might do this to protect certain jobs. We might think that we need certain industries – such as food production or steel-making – just in case things go wrong in the wider world. We might want to restrict imports from countries with lower labour or environmental standards so they can’t undercut our industries.

This approach is known as protectionism. Many economists agree that some restrictions on trade are desirable, but that we should be careful, as such restrictions can make us poorer overall. For example, limits on agricultural imports may be good for British farmers, but they also increase food prices.

The following sections set out some of the arguments in more detail.

Arguments for free trade

There are several key arguments in favour of free trade:

  • Free trade increases the size of the economy as a whole. It allows goods and services to be produced more efficiently. That’s because it encourages goods or services to be produced where natural resources, infrastructure, or skills and expertise are best suited to them. It increases productivity, which can lead to higher wages in the long term. There is widespread agreement that rising global trade in recent decades has increased economic growth.
  • Free trade is good for consumers. It reduces prices by eliminating tariffs and increasing competition. Greater competition is also likely to improve quality and choice. Some things, such as tropical fruit, would not be available in the UK without trade.
  • Reducing non-tariff barriers can remove red tape, thus reducing the cost of trading. If companies that trade in several countries have to work with only one set of regulations, their costs of ‘compliance’ come down. In principle, this will make goods and services cheaper.
  • In contrast, protectionism can result in destructive trade wars that increase costs and uncertainty as each side attempts to protect its own economy. Protectionist rules can tend to favour big business and vested interests, as they have the resources to lobby most effectively.

Arguments for protectionism

While free trade increases the size of the economy as a whole, it isn’t always good for everyone:

  • As more countries experience industrial development, traditional domestic industries can decline. In the UK, for example, the shipbuilding industry has declined in the face of international competition since the 1950s and currently steel production faces increasing competition. Protectionism can help preserve jobs in these sectors, or at least slow the process of change.
  • Protectionism can also help build up new industries. In sectors with high start-up costs, new firms might find it difficult to compete if there is not support from government in the form of tariffs or subsidies. Once they have become competitive, such barriers can be removed.
  • Protectionism can be used to safeguard ‘strategic’ industries such as energy, water, steel, armaments and food. For example, ‘food security’ may be seen as important so that we can feed ourselves if something terrible happens to disrupt the system of world trade.
  • Some people worry that free trade deals can lead to a lowering of standards. Such deals might require us to let in goods and services even though they don’t meet our standards, which might then be cheaper than those made by domestic industries. For example, some people have been worried recently that a free trade deal with the US might let in imports of chlorine-washed chicken. There might also be pressure to reduce our standards for workers’ rights or environmental protection so that our companies can compete with companies in countries that have lower standards.

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Free Trade vs. Protectionism

The priorities of a certain government regime dictate its economic policy. Protectionism limits imports by imposing tariffs to promote domestic industries, while free trade reduces barriers to international trade. If the goal is to take care of the country’s citizens, the better economic policy is protectionism because it encourages long-term economic self-sufficiency. Placing restrictions on foreign competitors in the form of surcharges and subsidies ensures the survival and diversity of domestic industries. While globalized trade is praised for offering the best quality at the cheapest prices, there is a dangerous pattern of international conglomerates raising their prices to inaccessible heights once they have beaten out local competitors. Protectionism, therefore, prevents the formation of global monopolies and ensures long-term food security. However, it generates a finite amount of wealth because the consumer base is limited to the population of one country. This drawback might even result in decreased entrepreneurship because there is less incentive to innovate.

Free trade brings more wealth compared to protectionism, but only to a limited sector of society. It benefits the participants of industries that are capable of competing on the international market and appealing to a global consumer base. The last few decades of neoliberalism have shown that free trade contributes to increasing global wealth inequality. Furthermore, it enables corporations to outsource production to foreign countries with cheaper labor or fewer regulations. This results in unemployment and limited opportunity for U.S. citizens, and exploitation of foreign workers. In general, I believe that the promises of free trade have been proven false and that protectionism benefits ordinary citizens more. The creation of wealth does not necessarily imply better living standards for all. However, since the question specifies that the goal is the country’s enrichment, the better economic policy is free trade.

While a strong national currency might intuitively seem like the obvious preference, it presents certain advantages and disadvantages that make it useful only to a certain extent. A currency is considered strong when its value is high relative to other currencies on the foreign exchange market. Throughout 2021, the U.S. dollar strengthened and can now be traded for more foreign currency (Denton, 2021). Firstly, this translates into lower prices for American consumers since the price of imports for goods produced abroad falls. Living standards and available disposable income thus increase for ordinary citizens. American companies that depend on imported raw materials also have lower production costs and larger profit margins. Any employees who receive their salary in U.S. dollars have more purchasing power abroad, so expatriates and travelers also enjoy higher standards.

However, a strengthening currency hurts U.S. businesses both in the domestic and foreign markets. Consumers prefer the cheaper prices of imports, which leads to a fall in domestic demand. Companies are forced to either close or be incentivized to transfer manufacturing to countries with cheaper labor, resulting in the loss of U.S. jobs. Furthermore, prices are higher for foreign consumers relative to their national currency, and thus foreign sales also decrease as the market looks for cheaper alternatives. Therefore, a strong currency is beneficial for ordinary American consumers in the short-term but dangerous in the long term because it threatens the competitiveness of U.S. businesses. If faced with an ultimatum, a strong currency is preferable to a weak one since it benefits ordinary citizens more, but the ideal situation is a sustainable equilibrium.

Denton, J. (2021). The dollar is near a 16 month-high: Why it could rise even higher. Barron’s. Web.

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StudyKraken. (2022, December 6). Free Trade vs. Protectionism. https://studykraken.com/free-trade-vs-protectionism/

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essay on free trade vs protectionism

Free Trade vs. Protectionism

essay on free trade vs protectionism

Speakers Don Boudreaux ,

Release Date August 31, 2011

According to Prof. Don Boudreaux, free trade is nothing more than a system of trade that treats foreign goods and services no differently than domestic goods and services. Protectionism, on the other hand, is a system of trade that discriminates against foreign goods and services in an attempt to favor domestic goods and services. In theory, free trade outperforms protectionism by bringing lower cost goods and services to consumers. In practice, the benefits of free trade can be seen in countries like America and Hong Kong. Both countries have a relatively high degree of free trade, and, as a consequence, have experienced an explosion of wealth.

  • Desert Island Game  ( game, beginner) : Can you learn something about trade and cooperation by being marooned on a desert island?
  • Trade Ruler  ( game, advanced) : As the Supreme Ruler of an island, you want the country to prosper. By engaging in international trade, you can achieve this goal.
  • Free Trade [Article]: Alan Blinder summarizes the meaning of free trade in this short essay.
  • Protectionism [Article]: Jagdish Bhagwati, the dean of trade economists, explains the consequences of protectionism.
  • Comparative Advantage [Article]: Donald J. Boudreaux provides an introduction to the principle of comparative advantage, which is at the heart of the economic case for free trade.
  • Pay close attention A Petition , chapter seven of Economic Sophisms
  • Free Trade Under Fire, 3rd edition [Book]: Douglas A. Irwin, one of today’s leading trade economists, reviews the facts and arguments relevant to the question: Should nations trade freely?
  • The Choice, 3rd edition [Book]: Russell Roberts provides a brief, brilliant, eloquent, and moving ghost story on the consequences of free trade and protectionism.
  • Globalization and Its Discontents [Book]: Joseph E. Stiglitz, a Nobel-laureate economist, shares his reasons for why he is more skeptical of free trade than are most economists.

Free Trade vs. Protectionism Free trade is simply a policy of treating foreign goods and services no differently than domestic goods and services are treated. Free trade is a policy of allowing domestic consumers to buy from abroad just as freely as they can buy at home. Protectionism is a policy of discriminating against foreign goods and services, a policy of saying to domestic consumers, “If you want to buy foreign-made goods and services, you have to jump through some extra large hurdles to buy those goods and services.” By far, the chief tool of protectionism is a tariff, and a tariff is a tax on imports. It’s a special levy that consumers in the home economy are forced to pay if they want to buy goods made abroad. In practice, the tariffs are imposed on the importers of the good, and so that higher tax is reflected in a higher price of the good. So, when consumers buy the good, they don’t necessarily see the tariff, they just see the price that reflects the tariff that the importer of the good is forced by the government to pay for the privilege of importing that good. Free trade is not just a theory; it’s been practiced. The greatest example is Hong Kong. Hong Kong has virtually no natural resources; I think feldspar is the chief natural resource of Hong Kong. And Hong Kong is one of the world’s most wealthy places. And the reason Hong Kong is wealthy is because for years Hong Kong has had a policy of pretty much unilateral free trade. It has a deep water port, and it allows its citizens to buy, on whatever terms its citizens want to buy, goods and services from wherever else in the world they want to buy those goods and services. As a result, Hong Kong is very, very rich. The United States is another example of success of free trade. One of the intended consequences of the 1787 Constitution was to turn the United States into a free-trade zone. The Founders didn’t use the term “free-trade zone,” because it wasn’t invented back then, but that’s what they had in mind. So as a consequence, we have this huge transcontinental country, from the Atlantic to the Pacific, from the Gulf Coast up to Canada, Americans are free to buy from any other American that they want in this huge free-trade zone. And so people in Maine buy pineapples from people in Hawaii, people in Hawaii buy maple syrup from people in Maine. One of the reasons for the United States’ enormous economic growth over the past 2 centuries and high standard of living is that we have total free trade within America. There are no tariffs, there are no trade restrictions. If protectionism was such a dandy thing, then you’d think each state could make its citizens wealthier by putting up trade restrictions around the states’ borders. They don’t do that, fortunately, because the Commerce Clause in the Constitution prohibits such trade restrictions. As a consequence, we have this huge free-trade zone in America and it’s unquestionable that the free trade that takes place within this huge transcontinental nation is a major reason for Americans’ high standard of living and continued economic growth.

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COMMENTS

  1. Free Trade vs. Protectionism: The Tariff Debate in the United States

    Free Trade vs Protectionism. While protectionists such as William McKinley argued that high tariff walls protected infant industries, allowing them to mature into fully developed manufacturers, they also meant higher production costs and thus higher prices for American consumers. By 1892, when Taussig published the first edition of his book, he ...

  2. Free Trade Vs Protectionism: An Essay

    Free Trade Vs Protectionism: An Essay. This essay sample was donated by a student to help the academic community. Papers provided by EduBirdie writers usually outdo students' samples. With the increase in the interconnectedness of the world trade between countries has been increasing as well since a long time of history.

  3. Free Trade vs Protectionism: Understanding the Concepts

    June 26, 2023. Free trade and protectionism represent two opposing approaches to international trade. Free trade emphasizes the removal of trade barriers, promoting economic efficiency and market access. Protectionism aims to protect domestic industries but can lead to higher prices and reduced consumer choice.

  4. Free Trade vs. Protectionism: Is Free Trade Really Free?

    The experts agree that in general, a freer trade environment rather than protectionism is better for the world economy. Khanna states that with protectionism, "you're impeding the free flow of ...

  5. Free Trade vs. Protectionism

    Introduction. Free trade and protectionism are two contrasting approaches to international trade. Free trade promotes the exchange of goods and services between countries without any barriers, such as tariffs or quotas, while protectionism aims to shield domestic industries from foreign competition through the implementation of trade barriers.

  6. Free Trade vs. Protectionism

    Free trade = cheaper goods for services; Protectionism = more expensive products but protected industries. As the international trade becomes more convenient due to globalization, a new domestic issue has arisen within many countries involving the implementation of free trade or protectionist practices when it comes to their local markets.

  7. What Is Free Trade? Definition, Pros, and Cons

    Free Trade Definition. Free trade is a largely theoretical policy under which governments impose absolutely no tariffs, taxes, or duties on imports, or quotas on exports. In this sense, free trade is the opposite of protectionism, a defensive trade policy intended to eliminate the possibility of foreign competition.

  8. 31.5: Arguments for and Against Protectionist Policy

    The argument is that free markets add value on a global level, while protectionism confines economic value to the nation employing it. Protectionist policies are a highly charged topic in economic debates, as economies work to attain the optimal balance of free trade and trade protectionism to capture the most value.

  9. 11: Evaluating the Controversy between Free Trade and Protectionism

    11.1: Introduction. The original arguments for free trade began to supplant mercantilist views in the early to mid-eighteenth century. Many of these original ideas were based on simple exchange or production models that suggested that free trade would be in everyone's best interests and surely in the national interest.

  10. Evaluating the Controversy between Free Trade and Protectionism

    Academics, philosophers, policy analysts, and legislators have addressed this question for hundreds of years. And unfortunately, there is still no definitive answer. The reason is that both free trade and selected protection have both positive and negative aspects. No one policy choice is clearly superior.

  11. Understanding the Pros and Cons of Protectionism

    Protectionism is a government-imposed trade policy by which countries attempt to protect their industries and workers from foreign competition. Protectionism is commonly implemented by the imposition of tariffs, quotas on import and exports, product standard, and government subsidies. While it may be of temporary benefit in developing countries ...

  12. (PDF) Free Trade and Protectionism

    This article begins with a definition of free international trade and a brief history of the evolution of free trade as an ideology and economic policy.

  13. Analysis of Free Trade Versus Protectionism

    Analysis of Free Trade Versus Protectionism. When it comes to looking at what kind of trade arrangement a country should seek to achieve economic growth, there are various debates favoring each side: free trade and protectionism. Free trade is when goods and services are traded between countries with as few limitations or restrictions as ...

  14. Protectionism and Free Trade System

    Protectionism and Free Trade System Essay. The available literature on global trade policies demonstrates that protectionism is the practice of countries to safeguard local industries and their labor force through the use of tariffs, quotas, subsidies, and other forms of administered protection intended to block or slow down the economic ...

  15. Protectionism vs Free Trade

    Protectionism vs Free Trade. John Spacey, updated on August 29, 2023. Protectionism is the restriction of trade with other nations in order to protect domestic firms.Free trade is the elimination of barriers to trade to create large open markets for goods and services.

  16. Trade: free trade v. protectionism

    Free trade vs protectionism: overview. One view says that we should make it as easy as possible for goods and services to move between countries. This approach is based on the argument that more trade makes us wealthier and is therefore a good thing. It is known as free trade. Another approach says that we should restrict trade.

  17. Free Trade vs. Protectionism: Exploring the Rationale ...

    Abstract. International trade plays a crucial role in the global economy. Today, more than 25% of global output is exported goods. Among them, specialization is the core of international trade ...

  18. Essay about Free Trade vs Protectionism

    Free Trade vs Protectionism. One of the greatest international economic debates of all time has been the issue of free trade versus protectionism. Proponents of free trade believe in opening the global market, with as few restrictions on trade as possible. Proponents of protectionism believe in concentrating on the welfare of the domestic ...

  19. Free Trade vs. Protectionism: Exploring the Rationale Behind Trade

    Free Trade vs. Protectionism: Exploring the Rationale Behind Trade Barriers. International trade plays a crucial role in the global economy. Today, more than 25% of global output is exported goods. Among them, specialization is the core of international trade because countries could apply their comparative advantage to increase productivity and ...

  20. PDF Protectionism and Free Trade: A Country's Glory or Doom?

    believe in Free Trade'.''[4] A. Practicing Free Trade: As an Advantage. The literature analyzing the economics of free trade is theoretical and empirical effects. Though it creates winners and losers, the broad consensus among members of the economics profession in the U.S. is that free trade is a large

  21. Free Trade vs. Protectionism

    Free Trade vs. Protectionism. The priorities of a certain government regime dictate its economic policy. Protectionism limits imports by imposing tariffs to promote domestic industries, while free trade reduces barriers to international trade. If the goal is to take care of the country's citizens, the better economic policy is protectionism ...

  22. Comparison Of Protectionism And Free Trade Economics Essay

    Therefore visa acquisition is another way of protectionism that is practiced by the local government. After Second World War many developed countries have been working towards elimination of protectionism in order to promote free trade which is more beneficial (Fawcett, 2007). Free trade is possible through a number of treaties.

  23. Free Trade vs. Protectionism

    Description. According to Prof. Don Boudreaux, free trade is nothing more than a system of trade that treats foreign goods and services no differently than domestic goods and services. Protectionism, on the other hand, is a system of trade that discriminates against foreign goods and services in an attempt to favor domestic goods and services.