Barriers to Trade

Introduction

A barrier to trade is a government-imposed restraint on the flow of international goods or services. Those restraints are sometimes obvious, but are most often subtle and non-obvious.

The most direct barrier to trade is an embargo—a blockade or political agreement that limits a foreign country's ability to export or import. Embargoes still exist, but they are difficult to enforce and are not common except in situations of war.

The most common barrier to trade is a tariff—a tax on imports. Tariffs raise the price of imported goods relative to domestic goods (goods produced at home).

Another common barrier to trade is a government subsidy to a particular domestic industry. Subsidies make those goods cheaper to produce than in foreign markets. This results in a lower domestic price. Both tariffs and subsidies raise the price of foreign goods relative to domestic goods, which reduces imports.

Barriers to trade are often called "protection" because their stated purpose is to shield or advance particular industries or segments of an economy. From an economic perspective, though, the costs to the economy of reducing its opportunities to trade almost always outweigh the benefits enjoyed by those who are protected. See also Exchange and Trade and Comparative Advantage and the Benefits of Trade.

Definitions and Basics

Protectionism, from the Concise Encyclopedia of Economics

The fact that trade protection hurts the economy of the country that imposes it is one of the oldest but still most startling insights economics has to offer. The idea dates back to the origin of economic science itself....

International Trade Agreements, from the Concise Encyclopedia of Economics

While virtually all economists think free trade is desirable, they differ on how best to make the transition from tariffs and quotas to free trade. The three basic approaches to trade reform are unilateral, multilateral, and bilateral....

Free Trade, from the Concise Encyclopedia of Economics

For more than two centuries, economists have steadfastly promoted free trade among nations as the best trade policy. Despite this intellectual barrage, many practical men and women of affairs continue to view the case for free trade skeptically, as an abstract argument made by ivory-tower economists with, at most, one foot on terra firma. Such people "know" that our vital industries must be protected from foreign competition....

Free Trade vs. Protectionism, a LearnLiberty video.

According to Don Boudreaux, free trade is a system of trade that treats foreign goods and services no differently than domestic goods and services.

In the News and Examples

If economists are so convinced of the benefits of free trade, why are there so many arguments against it in the press?

Many fallacies and myths have persisted for centuries, tracing back to an old idea called Mercantilism, which advocated promoting exports over imports (a positive Trade Balance). Even though Adam Smith, founder of modern economics, turned mercantilism on its head in 1776 with the publication of The Wealth of Nations, the errors continue. Below are some light, humorous readings confronting just a few of the most common logical errors, emphasizing how to answer when you hear those mistakes being made.

Popular myth: Trade barriers are good for the economy. Economic reality: Trade barriers benefit some people—usually the producers of the protected good—but only at even greater expense of others—the consumers. See this satire on lobbying: "A Petition", by Frédéric Bastiat (pronounced bas-tee-AH). Chapter 7 in Economic Sophisms, first published 1845 in France.

From the Manufacturers of Candles, Tapers, Lanterns, Candlesticks, Street Lamps,....

To the Honorable Members of the Chamber of Deputies....

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry....

We are suffering from the ruinous competition of a foreign rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun,...

Reciprocity. Popular myth: If we remove a trade barrier, shouldn't we require our trade partners to reduce theirs? Economic reality: Unilateral reduction of trade barriers is better than no reduction at all. See Reciprocity, by Frédéric Bastiat. Chapter 10 in Economic Sophisms, first published 1845 in France.

There are people (a small number, it is true, but there are some) who are beginning to understand that obstacles are no less obstacles for being artificial, and that we have more to gain from free trade than from a policy of protectionism, for precisely the same reason that a canal is more favorable to traffic than a "hilly, sandy, difficult road."

But, they say, free trade must be reciprocal. If we lowered the barriers we have erected against the admission of Spanish goods, and if the Spaniards did not lower the barriers they have erected against the admission of ours, we should be victimized. Let us therefore make commercial treaties on the basis of exact reciprocity; let us make concessions in return for concessions; let us make the sacrifice of buying in order to obtain the advantage of selling....

Saving and investment: Popular myth: If we keep running a trade deficit, won't we run down our economy, eating into our savings by continuing to buy more than we sell? Economic reality: Those who buy those foreign goods are not fools—they are searching world markets for the best deals.

Importing is the same as buying something—it just happens to be from a foreigner. (Similarly, exporting is the same as selling—it just happens to be to a foreigner.) Some things that are bought are used for current consumption; and other purchased things are used for investment.

If the citizens of the country running the trade deficit truly squander all the imports, or solely use them for current consumption year after year, then yes, the economy would be run down. To pay for the expenditures, capital—that is, saving and investment—would ultimately have to be eaten into, reducing future opportunities. But no one has an incentive to behave that way. Plus, the trade deficit is merely the symptom, not the cause of such spendthrift behavior; and reducing the trade deficit will not address the underlying problem.

Historically, persistent trade deficits have in fact been associated with the periods of greatest economic investment and development. (U.S. example: the development of the railroads. The Marshall plan rebuilt Europe, but meant massive trade deficits for Europe during that time.) Individuals have budget constraints and ultimately know that they cannot spend without paying for their purchases now or working harder or saving to pay in the future. Businesses buy investment goods wherever they can get them cheapest in the world, paying dollars in return. The government borrows to finance its spending wherever it can do so most cheaply in the world. For the most part, citizens make these decisions somewhat intelligently because they have incentives to do so. And in the long run, when those dollars we spend abroad are spent back by foreigners to buy our goods, trade will balance out anyway.

The fundamental principle is that people trade because trade benefits both parties. Apart from location, international trade is economically the same as domestic (within-country) exchange.

Exports, imports, and the trade balance. Political satire illustrating one of many errors of the mercantilist desire to increase exports and decrease imports, that accumulating dollar bills doesn't increase economic wealth: The Balance of Trade, by Frédéric Bastiat. Chapter 6 in Economic Sophisms, first published 1845 in France.

There is still a further conclusion to be drawn from all this, namely, that, according to the theory of the balance of trade, France has a quite simple means of doubling her capital at any moment. It suffices merely to pass its products through the customhouse, and then throw them into the sea. In that case the exports will equal the amount of her capital; imports will be nonexistent and even impossible, and we shall gain all that the ocean has swallowed up.

"You're just joking," the protectionists will say. "We couldn't possibly have been saying anything so absurd." Indeed you have, and, what is more, you are acting upon these absurd ideas and imposing them on your fellow citizens, at least as far as you can.

The truth is that we should reverse the principle of the balance of trade and calculate the national profit from foreign trade in terms of the excess of imports over exports. This excess, minus expenses, constitutes the real profit....

Jobs. Popular myth: Protectionism saves jobs. See Free Trade, by Alan S. Blinder.

A slogan occasionally seen on bumper stickers argues, "Buy American, save your job." This is grossly misleading for two main reasons. First, the costs of saving jobs in this particular way are enormous. Second, it is doubtful that any jobs are actually saved in the long run....

Many estimates have been made of the cost of "saving jobs" by protectionism. While the estimates differ widely across industries, they are almost always much larger than the wages of the protected workers....

But the situation is actually worse, for a little deeper thought leads us to question whether any jobs are really saved overall. It is more likely that protectionist policies save some jobs by jeopardizing others. Why? First, protecting one American industry imposes higher costs on others. For example, quotas on imports of semiconductors sent the prices of memory chips skyrocketing in the eighties, thereby damaging the computer industry. Steel quotas force U.S. automakers to pay more for materials, making them less competitive....

Aren't there any arguments left in favor of barriers to trade and protectionism? Don't exports create jobs? What about the painful relocations and retraining when whole industries lose their comparative advantage? What about new businesses—don't infant industries and startups deserve a chance to compete in world markets? What about agriculture? oil?—don't we have to have domestic farm and domestic oil industries so we can be self-sufficient in the event of war? What about government revenue—won't reducing tariffs reduce government revenue and increase the budget deficit? What about market failures—don't government subsidies sometimes correct for market failures, perhaps making the loss of the benefits from importing worth the cost?

[Suggested readings to come. Of these arguments, only the last one holds up, and even then, only in very specific circumstances. The conclusion is that most arguments in favor of trade barriers cannot be supported on economic grounds because the costs inevitably outweigh the benefits. Other, non-economic, grounds (political, emotional, etc.) have to be involved if you want to argue against free trade.]

A Little History: Primary Sources and References

A Brief History of International Trade Policy, by Douglas A. Irwin on Econlib

The theory of international trade and commercial policy is one of the oldest branches of economic thought. From the ancient Greeks to the present, government officials, intellectuals, and economists have pondered the determinants of trade between countries, have asked whether trade bring benefits or harms the nation, and, more importantly, have tried to determine what trade policy is best for any particular country....

The Myth of Free-Trade Britain, by John V.C. Nye on Econlib

In the two and a half centuries since Adam Smith first articulated the basic case for free trade, no event has been more significant than the British conversion to open markets in the nineteenth century. In the fable that is now conventional wisdom, nineteenth century Britain turned its back on protection and chose to open its markets to the world....

Did the Smoot-Hawley tariff contribute to the Great Depression? Great Depression, from the Concise Encyclopedia of Economics

In contrast, economist Charles Kindleberger, in The World in Depression, 1929-1939, sees the depression as a global event caused by a lack of world economic leadership. According to Kindleberger, Britain provided leadership before World War I. It fostered global trade by keeping its markets open, promoted expansion by making overseas investments, and prevented financial crises with emergency loans. After World War II the United States played this role. But between the wars no country did, and the depression fed on itself, Kindleberger argues. No country did enough to halt banking crises, and the entire industrial world adopted protectionist measures in attempts to curtail imports. In 1930, for example, President Herbert Hoover signed the Smoot-Hawley tariff, raising tariffs on dutiable items by 52 percent. The protectionism put an extra brake on world trade just when countries should have been promoting it....

Tariff, by Frank Taussig from the Encyclopedia Britannica

TARIFF (adapted in English; from the French, the word comes through the Spanish tarifa, a list or schedule of prices, from the Arabic, ta`rifa, information, an inventory, `arf, knowledge), a table or list of articles on which import or export duties are levied, with the amount of the duty specified, hence often used as a collective term for the duties imposed, or for the law or code of regulations imposing such duties or varying the scale of charges....

Customs Duties, from Lalor's Cyclopedia of Political Science

For more than two centuries, economists have steadfastly promoted free trade among nations as the best trade policy. Despite this intellectual barrage, many practical men and women of affairs continue to view the case for free trade skeptically, as an abstract argument made by ivory-tower economists with, at most, one foot on terra firma. Such people "know" that our vital industries must be protected from foreign competition....

Tariffs of the United States, from Lalor's Cyclopedia of Political Science

The subject of the present article is merely what has been done in the way of tariff legislation in the United States; and mention can be made only of the more important acts, without any attempt to explain all the motives which led to their enactments, or the manifold results that have followed their adoption and administration. And, first, as to the power of congress to impose tariffs....

Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home, by Adam Smith. Book IV, Chapter 2 in the Wealth of Nations

It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for.... [par. IV.2.11]

A Lecture on Free Trade: In Connexion with the Corn Laws by Thomas Hodgskin, on Econlib.

Advanced Resources

Some Aspects of the Tariff Question, by Frank Taussig on Econlib

[Influential study of the infant-industry argument—the idea that a fledgling industry might warrant protection till it gets started. Taussig started off believing in the idea but by the end of his research concluded that the argument was deeply flawed on both logical and empirical grounds. (Historical sidenote: Frank Taussig's daughter, Helen, is known as the founder of pediatric cardiology for her contributions to solving the mystery of "blue baby" syndrome.)]

Protectionism and the labor market. Protection or Free Trade, by Henry George on Econlib. Particularly see Chapter XXII, The Real Strength of Protection.

One needs but to talk with the rank and file of the supporters of protection in such a way as to discover their thoughts rather than their arguments, to see that beneath all the reasons assigned for protection there is something which gives it vitality, no matter how clearly those reasons may be disproved.

The truth is, that the fallacies of protection draw their real strength from a great fact, which is to them as the earth was to the fabled Antæus, so that they are beaten down only to spring up again. This fact is one which neither side in the controversy endeavors to explain—which free traders quietly ignore and protectionists quietly utilize; but which is of all social facts most obvious and important to the working classes—the fact that as soon, at least, as a certain stage of social development is reached, there are more laborers seeking employment than can find it—a surplus which at recurring periods of industrial depression becomes very large. Thus the opportunity of work comes to be regarded as a privilege, and work itself to be deemed in common thought a good....

Free Trade and Other Fundamental Doctrines of the Manchester School. Francis Hirst, editor.

Related Topics

Comparative Advantage and the Benefits of Trade
Exchange and Trade
Balance of Trade and Balance of Payments
Roles of Government
Consumers
Government Failures, Rent Seeking, and Public Choice