Transcription
So far in this series, we’ve learned that generally the more trade there is in a society, the more prosperous that society is. Therefore, it’s reasonable to assume that economists and government officials would always favor free trade, or international trade left to its natural course, without any restrictions whatsoever. However, this is not the case. In fact, many actually call for protectionism, or restricting trade to shield domestic industries from foreign competition. In this tutorial, we will learn about the advantages and disadvantages of both free trade and protectionism.
First of all, how does protectionism restrict trade? Probably the most common trade barrier is a tariff, or a tax on imported goods. Simply put, tariffs make foreign goods more expensive. Because of this, consumers might be more likely to buy domestic goods. Another common trade barrier is an import quota. An import quota places a limit on the amount of a good that can be imported. For example, the United States limits the amount of raw cotton that enters the country annually. Both tariffs and quotas are laws set by the government of the importing country.
Governments may get more creative with their trade barriers. For example, they may require that foreign companies get a license to sell goods in their country, and they could charge high licensing fees. Even safety regulations can act as trade barriers. Suppose one country treats the fruit it grows with a particular insecticide. Another country might ban any fruit treated with that insecticide.
Governments also put in place trade barriers for political reasons or in times of war. In response to the recent Russian invasion of Ukraine, the United States placed sanctions on Russia. A sanction is any action one government takes in order to punish or put pressure on another country. Often that action is an embargo, or an official ban on trade.
Economists often bring up three potential advantages of a protectionist economic policy. First, protectionism can help workers in industries that might be hurt by foreign competition. Suppose that Vietnam had a comparative advantage over the United States when it came to producing shirts. In particular, workers who made shirts in Vietnam were paid much less than workers who made shirts in the United States. Because of this, American wholesale distributors would have a greater incentive to buy shirts from Vietnam rather than at home in the United States because it’s cheaper. As a result, American shirt companies couldn’t compete and may have to close their factories and lay off workers. With protectionism, workers are more likely to keep their jobs.
Protectionism can also help infant industries, or industries that are in early stages of development. Because infant industries are new, they have a much harder time competing with more established industries. Because infant industries need time and experience to become efficient producers, tariffs that raise the price of imported goods can provide more time until they reach that efficiency. Finally, protectionism may be needed during national security crises. Certain industries may require protection because their products are essential to defending the country. For example, in the event of a war, a country would need an uninterrupted supply of steel and oil. Therefore, domestic production would be prioritized.
Ultimately, however, most economists argue that free trade is better than protectionism. First of all, free trade encourages truly competitive markets. If companies are not propped up by governments, they must seek a true comparative advantage and become more efficient on their own. When companies naturally become more competitive in a free market, they often become more successful.
Fundamentally, the biggest winner when it comes to free trade is you, the viewer. You get higher quality goods and services. Perhaps more importantly, you get cheaper goods and services. As we learned in an earlier tutorial about trade, consumers are generally better off with fewer barriers to trade. When we have more access to cheaper goods and services, our standard of living goes up.
Another advantage of free trade is that it promotes cooperative relationships among countries. If countries depend on each other for trade, they are much less likely to go to war with one another. To encourage free trade, most countries have signed international free trade agreements in recent decades. In fact, some of these pacts involve dozens of countries. Probably the most well known of these pacts is the European Union, which is the largest trading bloc in the world. In 1995, leaders from various countries met to form the World Trade Organization, or WTO, with the goal of making global trade more free. Today, it often functions by resolving trade disputes. Critics of the WTO argue that it sometimes gives too much economic power to large, multinational corporations.
In conclusion, while the world’s economies have moved toward free trade, controversy over trade continues. In fact, politicians often still get elected to government calling for protectionism. A recent example of a backlash against free trade arose in what became known as “Brexit,” which culminated in the withdrawal of the United Kingdom from the European Union in 2020. Most economists agree that this move will hurt the United Kingdom’s economy in the long term, but it’s important to remember that its own citizens voted to leave. Overall, free trade is likely here to stay for a long time, as it ultimately tends to provide a higher standard of living.