Updated Aug 19, 2020 Most economists support free trade. However, there are a few arguments that suggest that trade restrictions may be an appropriate measure to protect the domestic economy. The most common arguments for restricting trade are the protection of domestic jobs, national security, the protection of infant industries, the prevention of unfair competition, and the possibility to use the restrictions as a bargaining chip. We will look at each of those arguments in more detail below. The first and arguably most common argument against free trade is that it destroys domestic jobs. According to critics, free trade can destroy entire industries, because it causes prices to fall to the point where local producers cannot compete with suppliers from abroad. Often, the reasoning behind this is that virtually anything can be produced more cheaply in some other country somewhere else in the world. To illustrate this, think of an imaginary country called Freeland. Assume that Freeland has recently opened its country to free trade. Before this new policy, all goods and services consumed in the country were produced domestically. Among other products, Freeland now imports thousands of computers from a neighboring country, that can provide them cheaper. As a result, the prices of computers are falling, domestic production is decreasing, and people in the computer industry are losing their jobs. However, it is important to note that even if everything could be produced cheaper abroad, countries could still benefit from trading with one another. The reason for this is that the benefits from trade arise from comparative advantage as opposed to absolute advantage. For an in-depth explanation of the concept of comparative advantage, make sure to check out our article on comparative advantage and trade. Another common argument for restricting trade is that free trade threatens national security. The reasoning behind this is that trade allows countries to become dependent on other countries to supply vital resources. In the case of a war, these dependencies can become a liability, if countries are unable to be self-sufficient and produce essential goods themselves. For example, assume that Freeland imports the vast majority of all the steel used within the country from another one of its neighboring countries, called Meanland. Steel is a vital resource for the defense industry because it is used to produce weapons and armaments. Now, if a war broke out between the two countries and Meanland stopped supplying steel, Freeland would have a hard time producing enough steel itself to maintain its armed forces and defend its borders. It is undisputed that protecting critical industries from foreign competition may be appropriate if there are legitimate concerns about national security. The real challenge, however, is to determine which are the key industries and which concerns are justified. After all, it is important to keep in mind that producers have an incentive to overstate their role in national security to obtain protection from international competition. The third argument for trade restrictions is that it is sometimes necessary to protect infant industries. That means new domestic industries should be protected by temporary trade restrictions to help them develop and become competitive. The reasoning behind this is that these industries need time to catch up to their more developed and well-established competitors from abroad. Sometimes, this argument is also put forward to protect older industries that need to adjust to new circumstances. For example, let’s say that Freeland recently started producing microchips for computers. Because this industry is still in its infancy, production processes aren’t quite as efficient as they could be. As a result, the chips are more expensive than similar products from other countries. Therefore, industry leaders ask the government to impose temporary trade restrictions on microchips, to allow their industry to mature and become more competitive. Although this may seem like a reasonable argument at first glance, it is challenging to implement in reality. Imposing these kinds of restrictions would require the government to essentially bet on the future profitability of new industries and determine whether the benefits of protecting them could potentially outweigh the additional costs to consumers (incurred due to higher prices) in the future. In addition to that, it is politically difficult to remove protection from an industry once it has been introduced, even if it was considered temporary from the outset. Another argument for restricting trade is that free trade leads to unfair competition. That means, critics argue that producers from different countries are subject to different rules and regulations, which results in an uneven playing field. To illustrate this, suppose that Meanland subsidizes its automotive industry by granting significant tax benefits to producers. In that case, those firms can produce at lower prices than Freeland’s producers, which might be considered unfair. To counteract this, the government of Freeland could level the playing field by imposing tariffs on foreign cars. However, whether or not a country suffers from unfair competition depends on many factors. While the producers in the affected industries certainly suffer, the consumers usually benefit from the lower prices. Therefore, the country as a whole might even be better off with “unfair” competition than it would be otherwise. Finally, some people argue that trade restrictions (or the threat thereof) can be valuable assets in trade negotiations. That means they can be used as bargaining chips in negotiations to remove existing trade restrictions or prevent other countries from restricting free trade in the first place. For example, let’s assume that Meanland imposes a tariff on all ice cream imports from Freeland. That obviously hurts Freeland’s economy. Therefore, the government of Freeland threatens to impose a tariff on all candy imports from Meanland, unless the restrictions are removed. This may be a successful negotiation strategy if Meanland determines that the cost of the new restrictions would outweigh the benefits of their existing tariffs. In that case, they are better off lifting the current restrictions instead of engaging in a trade war. The issue with this strategy is that it may not always work. In fact, if the other country doesn’t respond to the threat, the plan may even backfire. In that case, the government has to make a choice. If it still decides to follow through, the new restrictions may hurt its own economy. On the other hand, if it backs down, it loses credibility, and it becomes even less likely that a similar threat would work in the future. Although most economists support free trade, there are a few arguments that suggest that trade restrictions may be an appropriate measure to protect the domestic economy. The first argument against free trade is that it destroys domestic jobs. Another common argument for restricting trade is that free trade threatens national security. The third argument for trade restrictions is that they are necessary to protect infant industries. The fourth argument states that free trade leads to unfair competition. And finally, some people argue that trade restrictions (or the threat thereof) can be valuable assets in trade negotiations.1. Protecting Domestic Jobs
2. National Security
3. Protecting Infant Industries
4. Preventing Unfair Competition
5. Using Restrictions as a Bargaining Chip
Summary
Sources
(2nd ed., revised ed.) Andover: Cengage Learning. 189-190.
Macroeconomics