Definitions and Basics
A barrier to trade is a government-imposed restraint on the flow of international goods or services. See Barriers to Trade video and video quiz at econedlink.
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 can also be modeled with supply and demand. Learn more and explore how tariffs affect the models in Tariffs and Protectionism at Marginal Revolution University.
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….
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. See also, “Commercial Reprisals are a Mistake,” by Pedro Schwartz.
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. See also
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. The term “trade deficit” has a negative connotation, but this can be misleading, like saying, “We’re getting killed on trade.” See “The ‘Trade Deficit’: Defective Language, Deficient Thinking,” by Daniel B. Klein and Donald J. Boudreaux.
Notice that if imports exceed exports, as they have done for decades in the United States, then, on net, more dollars leave the United States by Americans’ purchases of imports than come in by Americans’ sales of exports. Such a situation is termed a current-account deficit, or “trade deficit.” But the terminology could just as well be formulated the other way around, in a framework of husbanding stuff. Then, under the same condition of imports exceeding exports, the focus is on the stuff that, on net, is flowing into the United States. Now we view the exact same world but see a surplus. Instead of looking at matters as the conventional language does, we might call this new view the in-kind account. What in the conventional view is a “trade deficit” is in the in-kind view an “in-kind surplus.”
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? Shouldn’t we support industries that are vital to national defense? 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?
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.
Does National Security Justify Tariffs? by Jon Murphy at Econlib.
The concern about relying on foreign sources of war materials is that they could be unreliable or disrupted. In a world of shifting alliances, geographical concerns, and logistical issues, as in the 18th century Britain of Adam Smith, this fear might be justified. However, in 21st century America, it is less plausible.
National defense is often stated as a justified exception to a policy of free trade, and it may well be the most reasonable exception. Indeed, national defense is vital to economic prosperity. However, it is a plausible exception, not necessarily a probable one. Many of the tariff arguments presented under the “national defense” guise are flimsy. Given the negative impact of tariffs on wealth, when they are proposed, even under the national defense justification, they should be carefully examined to see if there is a true national defense issue or if domestic firms are merely justifying tariffs for protection from competition.