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.