argumentative essay about global free trade

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Arguments For and Against Free Trade

For free trade.

• INCREASED ECONOMIC GROWTH: Free trade agreements create larger markets for companies to sell their goods to. It means that instead of producing everything necessary within the borders of a country, countries can specialise on producing those things that they excel in and can instead import other things that would cost them a lot to produce. In this way, productivity is increased and the economies of the trading countries grow. It was estimated that the GDP of the entire EU would be 8.7% lower without the single market.
• FOREIGN DIRECT INVESTMENT CREATES NEW JOBS: Free trade areas incentivise foreign direct investment, meaning a long-term investment by an investor/business in an enterprise that is operating in a different country/economy. This has several benefits for the recipient country, as the investment often leads to the creation of jobs both directly and indirectly. For example, the ten Central and Eastern European countries that joined the European Single Market experienced a robust  1.5% annual growth in employment  until the breakout of the financial crisis.
• LOWER PRICES FOR CONSUMERS: Free trade means that global competition can enter the local market, leading to more options on the shelves for consumers and in many cases to lower prices. When trade barriers are in place, it is hard for foreign suppliers to sell their goods on the local market, as they are taxed far higher than their local competition. However, when barriers are removed, foreign suppliers can sell goods at similar conditions to local suppliers, which increases the competition for customers in the market and causes prices to drop. Sometimes, foreign companies can produce goods at a much lower cost than local ones, which means that consumers now have much cheaper options to buy.

AGAINST Free Trade

• JOB OUTSOURCING LEADS TO UNEMPLOYMENT: Free trade allows businesses to move their production to a place where it is cheaper to produce. In countries where labour or production costs are high, this often means that many people lose their jobs, because production is outsourced to cheaper places. Furthermore, companies in branches that had previously been protected by government subsidies are often unable to compete with global companies as markets are flooded with cheaper goods.
• SUB-STANDARD WORKING CONDITIONS AND LOW WAGES: Cheap production often comes at a high human cost. To save labour and production costs companies often move their production to “less developed” countries, and capitalise/exploit on the lack of labour protection laws there. Local workers are often forced to work under dangerous and inhumane conditions. One of the most severe examples of this was the  collapse of a garment factory in Bangladesh in 2013 , which had produced clothing for European companies (amongst others). In addition, workers are often forced to work for extremely little pay and in the most severe cases even include child labourers.
• FREE TRADE IS BAD FOR THE ENVIRONMENT: Production requires resources and through free trade companies gain access to the natural resources of other countries. In “less developed” countries vigorous environmental protection laws are often lacking, which allows companies to use fast harvesting methods, such as clearcut-logging, which are  harmful to the environment  and very unsustainable. The rigorous exploitation leads to a depletion of resources, which has severe negative long-term effects on the local environment. It also means that the resources are no longer available for the local population, leading to negative impacts on the local economy. Furthermore, goods and materials have to travel a great distance before they reach the final consumers. 90% of all traded goods reach their destination by ship, a sector which is responsible for  3% of global greenhouse gas emissions .

Photo by Dominik Lückmann on Unsplash

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A business journal from the Wharton School of the University of Pennsylvania

Is Free Trade Really Free? Why Protectionism Is Alive and Well

February 8, 2016 • 10 min read.

Most countries say they favor free and fair trade. But is protectionism really dead? And if not, how does it affect the progress of emerging markets?

• Public Policy

Recently, it was reported that the three largest U.S. airlines — American, United, and Delta — are protesting three major Persian Gulf-based airlines’ right to fly in the U.S. market. The American carriers claim that the Gulf carriers (Qatar Airways, Emirates, and Etihad) have received $42 billion in subsidies from their governments over the past several years, amounting to an unfair trade advantage that enables them to offer better and lower-cost service.

The controversy doesn’t surprise Reuben Abraham, CEO and senior fellow at IDFC Institute (a Mumbai-based think tank) and a member of the World Economic Forum Council on Emerging Multinationals. “There’s no doubt about it: The Gulf carriers, [or for example] state-owned enterprises in China — all of them have some level of state subsidies embedded into them. But one mustn’t forget that equally there are subsidies embedded into products on the other side of the world.”

He gives the example of the iPhone. “Most of the technology inside of an iPhone in some point in time or another has been funded by the U.S. government…. Lithium-ion batteries came out of research funded by the [Department of Energy],” he says, naming a host of other essential inventions — liquid crystal displays, micro hard drives, microprocessors and click wheels — that he says fall into the category of government-supported. This argument was put forth by economist Mariana Mazzucato in her 2013 book, The Entrepreneurial State.

“Now, you want a level playing field for the iPhone to compete in fair markets like India,” says Abraham. “[But] if I’m an Indian firm manufacturing let’s say a smartphone, it’s a little hard for me to compete against something that has a state subsidy.”

Protectionism: Not Gone, Just Underground

Leaders at the 2009 G20 summit in London — a group representing both developed and developing markets and accounting for 85% of the global economy — pledged they “would not repeat the historic mistakes of protectionism of previous eras.” And over a decade earlier in 1995, the World Trade Organization (WTO) was established to promote free trade and reduce trade barriers between nations. It now has 162 member countries.

Yet it appears that protectionism is by no means dead, according to Abraham as well as Ann Harrison, a Wharton management professor, and Tarun Khanna, a professor at Harvard Business School and a colleague of Abraham’s on the World Economic Forum Council on Emerging Multinationals. They say that protectionism, while certainly not as overt as it was 50 or 60 years ago, still exists in subtle and varied forms.

“An emerging market is actually competitive vis a vis labor…. My competitive advantage is not the iPhone … it is my techie.” –Reuben Abraham

“It’s not so black and white anymore,” says Khanna. Protectionism seen in the past was overt, he notes — such as having to pay tariffs of 40%, 50% or even 80% on imported cars. “In the old days, you had those [tariffs] in India and many countries in Africa.” The obvious result, he says, was that “the domestic providers of [items such as] cars were entirely protected, so they continued to produce terrible cars.”

Why Do Nations Practice Protectionism?

Harrison characterizes today’s anti-dumping and countervailing duty policies as a common form of protectionism used by most large countries including the U.S., EU, India, China and Mexico, although, she notes, the policies are sometimes put forth as a way to enforce fair trade. In these scenarios, a foreign firm introduces a low-cost product into an industrialized country such as the U.S. If the U.S. believes that the firm receives unfair advantages from its government, it will impose tariffs. “Brazilian orange juice, Mexican tomatoes … the list goes on and on,” says Harrison, adding that the tariffs can be very high. “When China was found guilty of dumping garlic, the garlic duty was 300%.”

Abraham points to farm subsidies as another form of protectionism. “You’re basically protecting domestic agricultural industry for political reasons.” Khanna agrees: “You see plenty of [this type of] protectionism in Japan … the Midwest United States, and so on.”

There can also be “disguised protectionism” in the form of health and safety requirements, says Harrison, as when a country blocks an import that it claims is dangerous to its consumers. Protectionism can even take the form of a marketing message: Harrison cites the U.S.’s “Buy American” campaign.

Khanna identified a prevalence of what he calls “bundled deals,” or “you can do this if you do that,” which he says are hard to characterize as purely protectionist. He says that China, for instance, has tended over the past seven or eight years to tell foreign companies wanting to build factories in China that in return, they will have to transfer some intellectual property to indigenous manufacturers. “It’s a little bit of an industrial policy type of issue, and it’s not strictly protectionism in the sense of being a tariff barrier…. It’s part of their bargaining power.”

Protectionism is not limited to the movement of goods, says Abraham. He states that another aspect involves labor, and that a “weird sort of hypocrisy” exists in the developed world on this point. “By and large, in the West when they talk about free trade, they’re talking about capital and capital goods — because that is where the West is competitive. But … an emerging market is actually competitive vis a vis labor.” He adds that from India’s perspective, for instance, “my competitive advantage is not the iPhone … it is my techie.”

In Abraham’s view, visas — and visa quotas — constitute “non-tariff trade barriers. It’s very hard for an Indian businessman to get a U.S. visa.” He adds that if an Indian professional wants to attend multiple conferences in Europe, for example, policies there require that the attendee apply for multiple short-term visas that grant only a handful of days’ stay for each event. “The average Westerner has no idea,” he says.

Is Protectionism Directed Against Emerging Markets?

The experts agree that in general, a freer trade environment rather than protectionism is better for the world economy. Khanna states that with protectionism, “you’re impeding the free flow of stuff that you might want to buy, or money that you and I want to invest, or talent that you and I might have, that needs to find its way to its best use.”

“Many countries have tried to use protectionism to nurture their home industries — but even though it makes sense in theory, countries screw it up about 75% of the time.” –Ann Harrison

Harrison observes that emerging markets might have some justification for being protectionist since their economies are struggling to establish themselves. On the other hand, she points out, this doesn’t always work well in practice. “Many countries have tried to use protectionism to nurture their home industries — but even though it makes sense in theory, countries screw it up about 75% of the time.”

She gives India as an example, saying that in the past it attempted to use protectionism to promote its nascent industries, but has only really become a successful, faster-growth country since it liberalized its economy in the early 1990s.

Are developing countries a particular target of protectionism by developed nations, as some have argued? Harrison says no. “I don’t think that emerging market multinationals are being targeted in any particular way. I think home countries just want to protect their own markets and promote their own firms, and I don’t think they discriminate in doing so.”

For instance, the French are “really trying to hold onto their cultural heritage,” she notes. And if one looks at the behavior of the French entertainment industry, for example, “they’re trying to … keep it as French as possible,” and “they don’t care where those foreign companies are coming from — whether emerging markets or the U.S.” She cites a similar example from the developing world. “Right now, India is protecting its retail sector, and it doesn’t care whether it’s a Walmart, a Carrefour or a Chinese retailer; it just wants to try to preserve the small mom-and-pop Indian stores.”

Abraham, on the other hand, does not dismiss the possibility of racism being an element in protectionism. He cites the much-publicized 2006 takeover of Arcelor, a French steel manufacturer, by Mittal, a company with its origins in India. According to The New York Times , Arcelor’s then-CEO, Guy Dollé, had made comments such as calling Mittal’s products lowly “eau de cologne” compared with the “perfume” produced by his own company. The comment where “racism really came out,” in Abraham’s view as well as others’, was when Dollé “actually had the gall to describe Mittal’s money as ‘monkey money.'”

Abraham also noted that Arcelor sought an alternative deal with a Russian steelmaker, recalling that Dollé praised that firm’s owner as “a true European.”

Khanna believes that countries’ levels of protectionism may ebb and flow with the political climate. Foreign business interests may become a target. “If you’re a politician and things aren’t going well economically and you want to get re-elected, an easy group to beat up is foreigners. They don’t vote.” This is true everywhere, he added, both in emerging markets and the developed world.

“If you’re a politician and things aren’t going well economically and you want to get re-elected, an easy group to beat up is foreigners. They don’t vote.” –Tarun Khanna

Along those lines, Abraham referred to the 1993 American movie Rising Sun , which he says played on popular sentiments of the time by portraying how Japanese business interests were “taking over everything in the United States…. It’s the flavor of the year, whether the Japanese or the Chinese or the Indians; it goes through these cycles.”

In looking at current trends, Khanna comments that protectionism “seems to be in great danger of rising,” calling it “one of those insidious things that we need to be vigilant about at all times.” He cites several potential contributing factors, including the increasing dominance of the far right and center right parties in Europe, a large number of “political and economic hotspots” in the world, and a general economic slowdown. This may lead to an environment, he says, in which countries “tend to favor the locals and batten down the hatches.”

The Danger of Blocs Over Free Trade

Both Harrison and Abraham see a trend toward preferential or regional trading blocs rather than multilateral global free trade, and predict it will continue. Harrison says the world is “clearly moving in the direction of … three giant blocs, with the Americas in one bloc, Europe in another bloc and Asia in another.” She notes that this trend benefits countries like the U.S., but very low-income countries — those “who are not big enough to come to the table” — typically get left out.

She adds that the Trans-Pacific Partnership Agreement (TPP) is an example of a regional trade agreement, and is “truly a way of keeping some countries in and keeping other countries — for example, China — out.” It is an example of “protectionism that is still alive and well.”

Abraham agrees, noting, “The U.S. wants to write the rules of that trade agreement, and then invite China at a later date…. But what if China, India and a couple of other countries make their own preferential trade agreement and leave the U.S. out? As the clout of these countries basically goes up, you may see more and more of that.”

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Chapter 11 Evaluating the Controversy between Free Trade and Protectionism

Perhaps the most important policy issue of an international trade course is to answer the question “Should a country pursue free trade or some type of selected protection?” Academics, philosophers, policy analysts, and legislators have addressed this question for hundreds of years. And unfortunately, there is still no definitive answer.

The reason is that both free trade and selected protection have both positive and negative aspects. No one policy choice is clearly superior. Nonetheless, economists who have studied trade theory and policy tend to support free trade more so than just about any other contentious economic policy under public consideration. The reasons for this near consensus are complex and poorly understood by the general public. This chapter explains the economic case for free trade through the lens of trade theory and argues that even though free trade may not be “optimal,” it is nonetheless the most pragmatic policy option a country can follow.

11.1 Introduction

Learning objective.

• Understand the basis for the modern support for free trade among economists.

For hundreds of years, at least since Adam Smith’s publication of The Wealth of Nations , the majority of economists have been strong supporters of free trade among nations. Paul Krugman once wrote that if there were an economist’s creed, it would surely contain the affirmation, “I advocate free trade.” See Paul Krugman, “Is Free Trade Passe?” Journal of Economic Perspectives 1, no. 2 (1987): 131–44.

The original arguments for free trade began to supplant mercantilist views in the early to mid-eighteenth century. Many of these original ideas were based on simple exchange or production models that suggested that free trade would be in everyone’s best interests and surely in the national interest. During the nineteenth and twentieth centuries, however, a series of objections were raised suggesting that free trade was not in everyone’s interest and perhaps was not even in the national interest. The most prominent of these arguments included the infant industry argument, the terms of trade argument, arguments concerning income redistribution, and more recently, strategic trade policy arguments. Although each of these arguments might be thought of as weakening the case for free trade, instead, each argument brought forth a series of counterarguments that have acted to reassert the position of free trade as a favored policy despite these objections. The most important of these counterarguments include the potential for retaliation, the theory of the second best, the likelihood of incomplete or imperfect information, and the presence of lobbying in a democratic system.

What remains today is a modern, sophisticated argument in support of free trade among nations. It is an argument that recognizes that there are numerous exceptions to the notion that free trade is in everyone’s best interests. The modern case for free trade does not contend, however, that these exceptions are invalid or illogical. Rather, it argues that each exception supporting government intervention in the form of a trade policy brings with it additional implementation problems that are likely to make the policy impractical.

Before presenting the modern argument, however, it is worth deflecting some of the criticisms that are sometimes leveled against the economic theory of free trade. For example, the modern argument for free trade is not based on a simplistic view that everyone benefits from free trade. Indeed, trade theory, and experience in the real world, teaches us that free trade, or trade liberalization, is likely to generate losers as well as winners.

The modern argument for free trade is not based on unrealistic assumptions that lead to unrealistic conclusions. Although it is true that many assumptions contained within any given trade model do not accurately reflect many realistic features of the world, the modern argument for free trade is not based on the results from any one model. Instead, the argument is based on a collection of results from numerous trade models, which are interpreted in reference to realistic situations. If one considers the collection of all trade models jointly, it is much more difficult to contend that they miss realistic features of the world. Trade theory (as a collection of models) does consider imperfectly competitive markets, dynamic effects of trade, externalities in production and consumption, imperfect information, joint production, and many other realistic features. Although many of these features are absent in any one model, they are not absent from the joint collection of models, and it is this “extended model” that establishes the argument for free trade. Ideally, we would create a supermodel of the world economy that simultaneously incorporates all realistic features of the world and avoids what are often called “simplifying assumptions.” Unfortunately, this is not a realistic possibility. As anyone who has studied models of the economy knows, even models that are very simple in structure can be extremely difficult to comprehend, much less solve. As a result, we are forced to “interpret” the results of simple models as we apply them to the complex real world.

Key Takeaway

• The modern support for free trade by most economists is based on a collection of results from a collection of models that incorporate many realistic features of the world into the analysis.

Jeopardy Questions . As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

• The statement suggested by Paul Krugman as being an element of the economist’s creed—if ever there were such a thing.
• This is who will benefit from free trade according to a simplistic view held by some free trade advocates.
• This is what causes unrealistic conclusions in trade theory according to some free trade opponents.
• The conclusions of one model of international trade or many models of international trade are best used to make trade policy prescriptions.

11.2 Economic Efficiency Effects of Free Trade

• Learn the major source of support for free trade across a variety of trade models.

The main source of support for free trade lies in the positive production and consumption efficiency effects. In every model of trade, there is an improvement in aggregate production and consumption efficiency when an economy moves from autarky to free trade. This is equivalent to saying that there is an increase in national welfare. This result was demonstrated in the Ricardian model, the immobile factor model, the specific factor model, the Heckscher-Ohlin model, the simple economies-of-scale model, and the monopolistic competition model. The result can also be shown if there are differences in demand between countries. Each of these models shows that a country is likely to have greater national output and superior choices available in consumption as a result of free trade.

Production Efficiency

Improvements in production efficiency mean that countries can produce more goods and services with the same amount of resources. In other words, productivity increases for the given resource endowments available for use in production.

In order to achieve production efficiency improvements, resources must be shifted between industries within the economy. This means that some industries must expand while others contract. Exactly which industries expand and contract will depend on the underlying stimulus or basis for trade. Different trade models emphasize different stimuli for trade. For example, the Ricardian model emphasizes technological differences between countries as the basis for trade, the factor proportions model emphasizes differences in endowments, and so on. In the real world, it is likely that each of these stimuli plays some role in inducing the trade patterns that are observed.

Thus as trade opens, either the country specializes in the products in which it has a comparative technological advantage, or production is shifted to industries that use the country’s relatively abundant factors most intensively, or production is shifted to products in which the country has relatively less demand compared with the rest of the world, or production shifts to products that exhibit economies of scale in production.

If production shifts occur for any of these reasons, or for some combination of these reasons, then trade models suggest that total production would rise. This would be reflected empirically in an increase in the country’s gross domestic product (GDP). This means that free trade would cause an increase in the level of the country’s national output and income.

Consumption Efficiency

Consumption efficiency improvements arise for an individual when changes in the relative prices of goods and services allow the consumer to achieve a higher level of utility. Since the change in prices alters the choices a consumer has, we can say that consumption efficiency improvements imply that more satisfying choices become available. When multiple varieties of goods are available in a product category, as in the monopolistic competition model, then consumption efficiency improvements can mean that the consumer is able to consume greater varieties or is able to purchase a variety that is closer to his ideal.

Although improvements in consumption efficiency are easy to describe for an individual consumer, it is much more difficult to describe consumption efficiency conceptually for the aggregate economy. Nevertheless, when aggregate indifference curves are used to describe the gains from trade, it is possible to portray an aggregate consumption efficiency improvement. One must be careful to interpret this properly, though. The use of an aggregate indifference curve requires the assumptions that (1) all consumers have identical preferences and (2) there is no redistribution of income as a result of the changes in the economy. We have seen, however, that in most trade models income redistribution will occur as an economy moves to free trade, and it may be impossible to redistribute afterward. It is also likely that individuals have different preferences for goods, which also weakens the results using aggregate indifference curves.

Key Takeaways

• The main sources of support for free trade are the positive production and consumption efficiency effects that arise in numerous models when countries trade freely.
• Production efficiency improvements mean that countries produce more goods and services with the same amount of resources.
• Consumption efficiency improvements mean that countries consume a more satisfying mix of goods and services.
• The term often used as a synonym for an improvement in economic efficiency.
• The type of efficiency improvement in which productivity rises for the given resource endowments available for use in production.
• The type of efficiency improvement relating to consumer choice adjustments in response to a policy change.
• The enhancement of this is what many economic models show will arise by moving to free trade.

11.3 Free Trade and the Distribution of Income

Learning objectives.

• Recognize that a movement to free trade will cause a redistribution of income within the country.
• Understand how compensation can relieve the problems caused by income redistribution.

A valid criticism of the case for free trade involves the issue of income distribution. Although most trade models suggest that aggregate economic efficiency is raised with free trade, these same models do not indicate that every individual in the economy will share in the benefits. Indeed, most trade models demonstrate that movements to free trade will cause a redistribution of income between individuals within the economy. In other words, some individuals will gain from free trade while others will lose. This was seen in the immobile factor model, the specific factor model, the Heckscher-Ohlin model, and the partial equilibrium analysis of trade liberalization.

There have been two general responses by economists concerning the income distribution issue. Some have argued that the objective of economics is solely to determine the most efficient policy choices. Introductory textbooks often suggest that the objective of the economics discipline is to determine how to allocate scarce resources toward production and consumption. Economists describe an allocation as “optimal” when it achieves the maximum level of aggregate economic efficiency. Put in these terms, economic analysis is “positive” in nature. Positive economics refers to studies that seek to answer questions pertaining to how things work in the economy and the subsequent effects. Positive economic analysis does not intend to explain what “should” be done. Issues pertaining to income distribution are commonly thought of as “normative” in nature, in that the concern is often over what the distribution “should” be. If we apply this reasoning to international trade, then, issues such as the appropriate income distribution are beyond the boundaries of the discipline and should be left to policymakers, government officials, or perhaps philosophers to determine.

Perhaps a more common response by economists concerning the income distribution issue is to invoke the compensation principle. A substantial amount of work by economists has been done to show that because free trade causes an increase in economic efficiency, it is generally possible to redistribute income from the winners to the losers such that, in the end, every individual gains from trade. The basic reason this is possible is that because of the improvement in aggregate efficiency, the sum of the gains to the winners exceeds the sum of the losses to the losers. This implies that it is theoretically possible for the potential winners from free trade to bribe the losers and leave everyone better off as a result of free trade. This allows economists to argue that free trade, coupled with an appropriate compensation package, is preferable to some degree of protectionism.

One major practical problem with compensation, however, is the difficulty of implementing a workable compensation package. In order to achieve complete compensation, one must be able to identify not only who the likely winners and losers will be but also how much they will win and lose and when in time the gains and losses will accrue. Although this is relatively simple to do in the context of a single trade model, such as the Heckscher-Ohlin model, it would be virtually impossible to do in practice given the complexity of the real world. The real world consists of tens of thousands of different industries producing millions of products using thousands of different factors of production. The sources of trade are manifold, including differences in technology, endowments, and demands, as well as the presence of economies of scale. Each source of trade, in turn, stimulates a different pattern of income redistribution when trade liberalization occurs. In addition, the pattern of redistribution over time is likely to be affected by the degree of mobility of factors between industries as the adjustment to free trade occurs. This was seen in the context of simple trade models, from the immobile factor model to the specific factor model to the Heckscher-Ohlin model.

Even in the context of simple trade models, a workable compensation mechanism is difficult to specify. An obvious solution would seem to be for the government to use taxes and subsidies to facilitate compensation. For example, the government could place taxes on those who would gain from free trade (or trade liberalization) and provide subsidies to those who would lose. However, if this were implemented in the context of many trade models, then the taxes and subsidies would change the production and consumption choices made in the economy and would act to reduce or eliminate the efficiency gains from free trade. The government taxes and subsidies, in this case, represent a policy-imposed distortion that, by itself, reduces aggregate economic efficiency. If the compensation package reduces efficiency more than the movement to free trade enhances efficiency, then it is possible for the nation to be worse off in free trade when combined with a tax/subsidy redistribution scheme. Dixit and Norman (1980) showed that under some conditions it is possible to specify a tax and subsidy policy that would guarantee an increase in aggregate economic efficiency with free trade. See A. Dixit and V. Norman, Theory of International Trade: A Dual General Equilibrium Approach (Cambridge: Cambridge University Press, 1980). The simple way to eliminate this problem, conceptually, is to suggest that the redistribution take place as a “lump-sum” redistribution. A lump-sum redistribution A redistribution of income that takes place after the free trade equilibrium is reached—that is, after all production and consumption decisions are made but before the actual consumption takes place. is one that takes place after the free trade equilibrium is reached—that is, after all production and consumption decisions are made but before the actual consumption takes place. Then, as if in the middle of the night when all are asleep, goods are taken away from those who have gained from free trade and left at the doors of those who had lost. Lump-sum redistributions are analogous to Robin Hood stealing from the rich and giving to the poor. As long as this redistribution takes place after the consumption choices have been made and without anyone expecting a redistribution to occur, then the aggregate efficiency improvements from free trade are still realized. Of course, although lump-sum redistributions are a clever conceptual or theoretical way to “have your cake and eat it too,” it is not practical or workable in the real world.

This implies that although compensation can solve the problem of income redistribution at the theoretical level, it is unlikely that it will ever solve the problem in the real world. Although some of the major gains and losses from free trade may be identifiable and quantifiable, it is unlikely that analysts would ever be able to identify all who would gain and lose in order to provide compensation and assure that everyone benefits. This means that free trade is extremely likely to cause uncompensated losses to some individuals in the economy. To the extent that these individuals expect these losses and can measure their expected value (accurately or not), then there will also likely be continued resistance to free trade and trade liberalization. This resistance is perfectly valid. After all, trade liberalization involves a government action that will cause injury to some individuals for which they do not expect to be adequately compensated. Furthermore, the economic efficiency argument will not go very far to appease these groups. Would you accept the argument that your expected losses are justifiable because others will gain more than you lose?

One final argument concerning the compensation issue is that compensation to the losers may not even be justifiable. This argument begins by noting that those who would lose from free trade are the same groups who had gained from protectionism. Past protectionist actions represent the implementation of government policies that had generated benefits to certain selected groups in the economy. When trade liberalization occurs, then, rather than suggesting that some individuals lose, perhaps it is more accurate to argue that the special benefits are being eliminated for those groups. On the other hand, those groups that benefit from free trade are the same ones that had suffered losses under the previous regime of protectionism. Thus their gains from trade can be interpreted as the elimination of previous losses. Furthermore, since the previous protectionist actions were likely to have been long lasting, one could even argue that the losers from protection (who would gain from free trade) deserve to be compensated for the sum total of their past losses. This would imply that upon moving to free trade, a redistribution ought to be made not from the winners in trade to the losers but from the losers in trade to the winners. Only in this way could one make up for the transgressions of the past. As before, though, identifying who lost and who gained and by how much would be virtually impossible to achieve, thus making this compensation scheme equally unworkable.

• One major problem with movements to free trade is the redistribution of income described in many trade models. This means that although some individuals will benefit from free trade, many others will lose.
• One way to deflect the redistribution concern is to argue that economic analysis provides the positive results of trade policies and is not intended to answer the normative questions of what should be done.
• Another way to deflect the concern about income redistribution is to support compensation from the winners to the losers to assure that all parties benefit from free trade.
• Because compensation requires an enormous amount of information about who wins and loses from trade, how much they win and lose, and when they win and lose, it is impractical to impossible to completely compensate the losers from free trade in a real-world setting.
• A principle that, if applied in practice, could eliminate the negative impacts of income redistribution that may arise with free trade.
• This is what many trade models show will happen to national income because of trade liberalization.
• This type of compensation can avoid affecting consumption and production decisions.
• The compensation using these two government policies is likely to affect production and consumption decisions.
• The name of the mythical character best associated with lump-sum compensation.
• Of a little or a lot , this is how much information the government needs to make compensation effective.

11.4 The Case for Selected Protection

• Identify the cases in which the implementation of selected protectionism, targeted at particular industries with particular goals in mind, could raise national welfare.

An argument for selected protection A trade policy that is appropriately selected so as to raise national welfare in a market containing market imperfections or distortions. arises in the presence of imperfectly competitive markets, market distortions, or both. In these cases, it is often possible to show that an appropriately targeted trade policy (selected protection) can raise aggregate economic efficiency. In other words, free trade need not always be the best policy choice when the objective is to maximize national welfare. Numerous examples found in the trade literature demonstrate that selected protectionism applied under certain circumstances can raise national welfare. These results are in contrast with the standard trade models, which show that free trade is the best policy to maximize economic efficiency. The reason for the conflict is that the standard trade models, in most cases, explicitly assume that markets are perfectly competitive and implicitly assume there are no market distortions.

This general criticism of the standard case for free trade begins by noting that the real world is replete with examples of market imperfections and distortions. These include the presence of externalities both static and dynamic, both positive and negative, and in both production and consumption; markets in which production takes place with monopolistic or oligopolistic firms making positive profits; markets that do not clear, as when unemployment arises; the presence of public goods; the presence of imperfect or asymmetric information; the presence of distorting government policies and regulations; and the presence of national market power in international markets. When these features are included in trade models, it is relatively easy to identify trade policies that can sufficiently correct the market imperfection or distortion so as to raise aggregate efficiency.

For example, an optimal tariff or optimal quota set by a country that is large in an international import market can allow the nation to take advantage of its monopsony power in trade and cause an increase in national welfare. Similarly, an optimal export tax or voluntary export restraint (VER) set by a large country in an international export market will allow it to take advantage of its monopoly power in trade and generate an increase in welfare. This argument for protection is known as the “terms of trade argument.”

A tariff applied to protect an import-competing industry from a surge in foreign imports may reduce or eliminate the impending unemployment in the industry. If the cost of unemployment to the affected workers is greater than the standard net national welfare effect of the tariff, then the tariff may improve national welfare.

A tariff used to restrict imports of goods from more-efficient foreign firms may sufficiently stimulate learning effects within an industry to cause an increase in productivity that, in time, may allow the domestic firms to compete with foreign firms—even without continued protection. These learning effects—in organizational methods, in management techniques, in cost-cutting procedures—might in turn spill over to other sectors in the economy, stimulating efficiency improvements in many other industries. All together, the infant industry protection may cause a substantial increase in the growth of the gross domestic product (GDP) relative to what might have occurred otherwise and thus act to improve national welfare.

A tariff used to stimulate domestic production of a high-technology good might spill over to the research and development division and cause more timely innovations in next-generation products. If these firms turn into industry leaders in these next-generation products, then they will enjoy the near-monopoly profits that accrue to the original innovators. As long as these long-term profits outweigh the short-term costs of protection, national welfare may rise.

An import tariff applied against a foreign monopoly supplying the domestic market can effectively shift profits from the foreign firm to the domestic government. Despite the resulting increase in the domestic price, national welfare may still rise. Also, export subsidies provided to domestic firms that are competing with foreign firms in an oligopoly market may raise domestic firms’ profits by more than the cost of the subsidy, especially if profits can be shifted away from the foreign firms. These two cases are examples of a strategic trade policy.

If pollution, a negative production externality, caused by a domestic import-competing industry is less than the pollution caused by firms in the rest of the world, then a tariff that restricts imports may sufficiently raise production by the domestic firm relative to foreign firms and cause a reduction in world pollution. If the benefits that accrue due to reduced worldwide pollution are greater than the standard cost of protection, then the tariff will raise world welfare.

Alternatively, if pollution is caused by a domestic export industry, then an export tax would reduce domestic production along with the domestic pollution that the production causes. Although the export tax may act to raise production and pollution in the rest of the world, as long as the domestic benefits from the pollution reduction outweigh the costs of the export tax, domestic national welfare may rise.

If certain domestically produced high-technology goods could wind up in the hands of countries that are our potential enemies, and if these goods would allow those countries to use the products in a way that undermines our national security, then the government could be justified to impose an export prohibition on those goods to those countries. In this case, if free trade were allowed in these products, it could reduce the provision of a public good, namely, national security. As long as the improvement in national security outweighs the cost of the export prohibition, national welfare would rise.

These are just some of the examples (many more are conceivable) in which the implementation of selected protectionism, targeted at particular industries with particular goals in mind, could act to raise national welfare, or aggregate economic efficiency. Each of these arguments is perfectly valid conceptually. Each case arises because of an assumption that some type of market imperfection or market distortion is present in the economy. In each case, national welfare is enhanced because the trade policy reduces or eliminates the negative effects caused by the presence of the imperfection or distortion and because the reduction in these effects can outweigh the standard efficiency losses caused by the trade policy.

It would seem from these examples that a compelling case can certainly be made in support of selected protectionism. Indeed, Paul Krugman (1987) wrote that “the case for free trade is currently more in doubt than at any time since the 1817 publication of [David] Ricardo’s Principles of Political Economy .” See Paul Krugman, “Is Free Trade Passe?” Journal of Economic Perspectives 1, no. 2 (1987): 131–44. Many of the arguments showing the potential for welfare-improving trade policies described above have been known for more than a century. The infant industry argument can be traced in the literature as far back as a century before Adam Smith argued against it in The Wealth of Nations (1776). The argument was later supported by writers such as Friedrich List in The National System of Political Economy (1841) See Friedrich List, The National System of Political Economy , McMaster University Archive for the History of Economic Thought, http://socserv2.socsci.mcmaster.ca:80/~econ/ugcm/3ll3/list/index.html . and John Stuart Mill in his Principles of Political Economy (1848). See John Stuart Mill, Principles of Political Economy , McMaster University Archive for the History of Economic Thought, http://socserv2.socsci.mcmaster.ca:80/~econ/ugcm/3ll3/mill/index.html . The terms of trade argument was established by Robert Torrens in 1844 in The Budget: On Commercial and Colonial Policy . See Robert Torrens, The Budget: On Commercial and Colonial Policy (London: Smith, Elder, 1844). Frank Graham, in his 1923 article “Some Aspects of Protection Further Considered,” noted the possibility that free trade would reduce welfare if there were variable returns to scale in production. See Frank Graham, “Some Aspects of Protection Further Considered,” The Quarterly Journal of Economics 37, no. 2 (February 1923): 199–227. During the 1950s and 1960s, market distortions such as factor-market imperfections and externality effects were introduced and studied in the context of trade models. The strategic trade policy arguments are some of the more recent formalizations showing how market imperfections can lead to welfare-improving trade policies. Despite this long history, economists have generally continued to believe that free trade is the best policy choice. The main reason for this almost unswerving support for free trade is because as arguments supporting selected protectionism were developed, equally if not more compelling counterarguments were also developed.

• In the presence of market imperfections or distortions, selected protection can often raise a country’s national welfare.
• Because real-world markets are replete with market imperfections and distortions, free trade is not the optimal policy to improve national welfare.
• The term used to describe market conditions that open up the possibility for welfare-improving trade policies.
• The term used to describe a market equilibrium in which market imperfections or distortions are present.
• Of very many or very few , this is the amount of market imperfections likely to be present in modern national economies.
• Of true or false , a tariff can raise a nation’s welfare when it is a large importing country.
• Of true or false , a tariff can raise national welfare in the presence of an infant industry.
• Of true or false , a tariff can raise national welfare if all markets are perfectly competitive and if there are no market imperfections or distortions.

Identify a trade policy that can potentially raise national welfare in each of the following situations.

• When a foreign monopoly supplies the domestic market with no import-competing producers.
• When a domestic negative production externality is caused by a domestic industry that exports a portion of its production to the rest of the world.
• When a positive production externality is caused by a domestic industry that competes with imports.
• When a domestic negative consumption externality is caused by domestic consumers in a market in which the country exports a portion of its production to the rest of the world.
• When a country is large in an export market.

11.5 The Economic Case against Selected Protection

• Learn the valid counterarguments to the use of selected protection when market imperfections or distortions are present.

The economic case against selected protectionism does not argue that the reasons for protection are conceptually or theoretically invalid. Indeed, there is general acceptance among economists that free trade is probably not the best policy in terms of maximizing economic efficiency in the real world. Instead, the counterarguments to selected protectionism are based on four broad themes: (1) potential reactions by others in response to one country’s protection, (2) the likely presence of superior policies to raise economic efficiency relative to a trade policy, (3) information deficiencies that can inhibit the implementation of appropriate policies, and (4) problems associated with lobbying within democratic political systems. We shall consider each of these issues in turn.

The Potential for Retaliation

One of the problems with using some types of selected protection arises because of the possibility of retaliation by other countries using similar policies. For example, it was shown that whenever a large country in the international market applies a policy that restricts exports or imports (optimally), its national welfare will rise. This is the terms of trade argument supporting protection. However, it was also shown that the use of an optimal trade policy in this context always reduces national welfare for the country’s trade partners. Thus the use of an optimal tariff, export tax, import quota, or voluntary export restraint (VER) is a “beggar-thy-neighbor” policy—one country benefits only by harming others. For this reason, it seems reasonable, if not likely, that the countries negatively affected by the use of such policies, if they are also large in international markets, would retaliate by setting optimal trade policies restricting their exports and imports to the rest of the world. In this way, the retaliating country could generate benefits for itself in some markets to compensate for its losses in others.

However, the final outcome after retaliation occurs is very likely to be a reduction in national welfare for both countries. Harry Johnson (1953) showed the possibility that one country might still improve its national welfare even after a trade war (i.e., optimal protection followed by optimal retaliation); however, this seems an unlikely outcome in real-world cases. Besides, even if one country did gain, it would still do so at the expense of its trade partners, which remains an unsavory result. See Harry G. Johnson, “Optimum Tariffs and Retaliation,” Review of Economic Studies 21, no. 2 (1953): 142–53. This occurs because each trade policy action results in a decline in world economic efficiency. The aggregate losses that accrue to one country as a result of the other’s trade policy will always exceed the benefits that accrue to the policy-setting country. When every large country sets optimal trade policies to improve its terms of trade, the subsequent reduction in world efficiency dominates any benefits that accrue due to its unilateral actions.

What this implies is that although a trade policy can be used to improve a nation’s terms of trade and raise national welfare, it is unlikely to raise welfare if other large countries retaliate and pursue the same policies. Furthermore, retaliation seems a likely response because maintenance of a free trade policy in light of your trade partner’s protection would only result in national aggregate efficiency losses. Indeed, Robert Torrens, the originator of the terms of trade argument, was convinced that a large country should maintain protective barriers to trade when its trade partners maintained similar policies. The case for unilateral free trade even when one’s trade partners use protective tariffs is only valid when a country is small in international markets.

Perhaps the best empirical support for this result is the experience of the world during the Great Depression of the 1930s. After the United States imposed the Smoot-Hawley Tariff Act of 1930, raising its tariffs to an average of 60 percent, approximately sixty countries retaliated with similar increases in their own tariff barriers. As a result, world trade in the 1930s fell to one-quarter of the level attained in the 1920s. Most economists agree that these tariff walls contributed to the length and severity of the economic depression. That experience also stimulated the design of the reciprocal trade liberalization efforts embodied in the General Agreement on Tariffs and Trade (GATT).

The issue of retaliation also arises in the context of strategic trade policies. In these cases, a trade policy can be used to shift profits from foreign firms to the domestic economy and raise domestic national welfare. The policies work in the presence of monopolistic or oligopolistic markets by raising the international market share for one’s own firms. The benefits to the policy-setting country arise only by reducing the profits of foreign firms and subsequently reducing those countries’ national welfare. One exception arises in the model by J. Eaton and G. Grossman, “Optimal Trade and Industrial Policy under Oligopoly,” Quarterly Journal of Economics 101, no. 2 (1986): 383–406. Thus one country’s gains are other country’s losses, and strategic trade policies can rightfully be called beggar-thy-neighbor policies. Since foreign firms would lose from our country’s policies, as before, it is reasonable to expect retaliation by the foreign governments. However, because these policies essentially just reallocate resources among profit-making firms internationally, it is unlikely for a strategic trade policy to cause an improvement in world economic efficiency. This implies that if the foreign country did indeed retaliate, the likely result would be reductions in national welfare for both countries.

Retaliations would only result in losses for both countries when the original trade policy does not raise world economic efficiency. However, some of the justifications for protection that arise in the presence of market imperfections or distortions may actually raise world economic efficiency because the policy acts to eliminate some of the inefficiencies caused by the distortions. In these cases, retaliation would not pose the same problems. There are other problems, though.

The Theory of the Second Best

One of the more compelling counterarguments to potentially welfare-improving trade policies relies on the theory of the second best. This theory shows that when private markets have market imperfections or distortions present, it is possible to add another (carefully designed) distortion, such as a trade policy, and improve economic efficiency both domestically and worldwide. The reason for this outcome is that the second distortion can correct the inefficiencies of the first distortion by more than the inefficiencies caused by the imposed policy. In economist’s jargon, the original distorted economy is at a second-best equilibrium. In this case, the optimal trade policy derived for an undistorted economy (most likely free trade) no longer remains optimal. In other words, policies that would reduce national welfare in the absence of distortions can now improve welfare when there are other distortions present.

This argument, then, begins by accepting that trade policies (protection) can be welfare improving. The problem with using trade policies, however, is that in most instances they are a second-best policy choice. In other words, there will likely be another policy—a domestic policy—that could improve national welfare at a lower cost than any trade policy. The domestic policy that dominates would be called a first-best policy. The general rule used to identify first-best policies is to use that policy that “most directly” attacks the market imperfection or distortion. It turns out that these are generally domestic production, consumption, or factor taxes or subsidies rather than trade policies. The only exceptions occur when a country is large in international markets or when trade goods affect the provision of a public good such as national security.

Thus the counterargument to selected protection based on the theory of the second best is that first-best rather than second-best policies should be chosen to correct market imperfections or distortions.

Since trade policies are generally second best while purely domestic policies are generally first best, governments should not use trade policies to correct market imperfections or distortions. Note that this argument does not contend that distortions or imperfections do not exist, nor does it assume that trade policies could not improve economic efficiency in their presence. Instead, the argument contends that governments should use the most efficient (least costly) method to reduce inefficiencies caused by the distortions or imperfections, and this is unlikely to be a trade policy.

Note that this counterargument to protection is also effective when the issue is income distribution. Recall that one reason countries may use trade policies is to achieve a more satisfying income distribution (or to avoid an unsatisfactory distribution). However, it is unlikely that trade policies would be the most effective method to eliminate the problem of an unsatisfactory income distribution. Instead, there will likely be a purely domestic policy that could improve income distribution more efficiently.

In the cases where a trade policy is first best, as when a country is large in international markets, this argument does not act as a counterargument to protection. However, retaliation remains a valid counterargument in many of these instances.

Information Deficiencies

The next counterargument against selected protectionism concerns the likely informational constraints faced by governments. In order to effectively provide infant industry protection, or to eliminate negative externality effects, stimulate positive externality effects, or shift foreign profits to the domestic economy, the government would need substantial information about the firms in the market, their likely cost structures, supply and demand elasticities indicating the effects on supply and demand as a result of price changes, the likely response by foreign governments, and much more. Bear in mind that although it was shown that selected protection could generate an increase in national welfare, it does not follow that any protection would necessarily improve national welfare. The information requirements arise at each stage of the government’s decision-making process.

First, the government would need to identify which industries possess the appropriate characteristics. For example, in the case of infant industries, the government would need to identify which industries possess the positive learning externalities needed to make the protection work. Presumably, some industries would generate these effects, while others would not. In the case of potential unemployment in a market, the government would need to identify in which industries facing a surge of imports the factor immobility was relatively high. In the case of a strategic trade policy, the government would have to identify which industries are oligopolistic and exhibit the potential to shift foreign profits toward the domestic economy.

Second, the government would need to determine the appropriate trade policy to use in each situation and set the tariff or subsidy at the appropriate level. Although this is fairly straightforward in a simple theoretical model, it may be virtually impossible to do correctly in a real-world situation. Consider the case of an infant industry. If the government identified an industry with dynamic intertemporal learning effects, it would then need to measure how the level of production would influence the size of the learning effects in all periods in the future. It would also need to know how various tariff levels would affect the level of domestic production. To answer this requires information about domestic and foreign supply and demand elasticities. Of course, estimates of past elasticities may not work well, especially if technological advances or preference changes occur in the future. All of this information is needed to determine the appropriate level of protection to grant as well as a timetable for tariff reduction. If the tariff is set too low or for too short a time, the firms might not be sufficiently protected to induce adequate production levels and stimulate the required learning effects. If the tariff is set too high or for too long a period, then the firms might become lazy. Efficiency improvements might not be made and the learning effects might be slow in coming. In this case, the production and consumption efficiency losses from the tariff could outweigh the benefits accruing due to learning.

This same information deficiency problem arises in every example of selected protection. Of course, the government would not need pinpoint accuracy to assure a positive welfare outcome. As demonstrated in the case of optimal tariffs, there would be a range of tariff levels that would raise national welfare above the level attained in free trade. A similar range of welfare-improving protection levels would also hold in all the other cases of selected protection.

However, there is one other informational constraint that is even ignored in most economic analyses of trade policies. This problem arises when there are multiple distortions or imperfections present in the economy simultaneously (exactly what we would expect to see in the real world). Most trade policy analyses incorporate one economic distortion into a model and then analyze what the optimal trade policy would be in that context. Implicitly, this assumes either that there are no other distortions in the economy or that the market in which the trade policy is being considered is too small to have any external effects on other markets. The first assumption is clearly not satisfied in the world, while the second is probably not valid for many large industries.

The following example suggests the nature of the informational problem. Suppose there are two industries that are linked together because their products are substitutable in consumption to some degree. Suppose one of these industries exhibits a positive dynamic learning externality and is having difficulty competing with foreign imports (i.e., it is an infant industry). Assume the other industry heavily pollutes the domestic water and air (i.e., it exhibits a negative production externality). Now suppose the government decides to protect the infant industry with an import tariff. This action would, of course, stimulate domestic production of the good and also stimulate the positive learning effects for the economy. However, the domestic price of this good would rise, reducing domestic consumption. These higher prices would force consumers to substitute other products in consumption. Since the other industry’s products are assumed to be substitutable, demand for that industry’s goods will rise. The increase in demand would stimulate production of that good and, because of its negative externality, cause more pollution to the domestic environment. If the negative effects to the economy from additional pollution are greater than the positive learning effects, then the infant industry protection could reduce rather than improve national welfare.

The point of this example, however, is to demonstrate that in the presence of multiple distortions or imperfections in interconnected markets (i.e., in a general equilibrium model), the determination of optimal policies requires that one consider the intermarket effects. The optimal infant industry tariff must take into account the effects of the tariff on the polluting industry. Similarly, if the government wants to set an optimal environmental policy, it would need to account for the effects of the policy on the industry with the learning externality.

This simple example suggests a much more serious informational problem for the government. If the real economy has numerous market imperfections and distortions spread out among numerous industries that are interconnected through factor or goods market competition, then to determine the true optimal set of policies that would correct or reduce all the imperfections and distortions simultaneously would require the solution to a dynamic general equilibrium model that accurately describes the real economy not only today but also in all periods in the future. This type of model, or its solution, is simply not achievable today with any high degree of accuracy. Given the complexity, it seems unlikely that we would ever be capable of producing such a model.

The implication of this informational problem is that trade policy will always be like a shot in the dark. There is absolutely no way of knowing with a high degree of accuracy whether any policy will improve economic efficiency. This represents a serious blow to the case for government intervention in the form of trade policies. If the intention of government is to set trade policies that will improve economic efficiency, then since it is impossible to know whether any policy would actually achieve that goal, it seems prudent to avoid the use of any such policy. Of course, the goal of government may not be to enhance economic efficiency, and that brings us to the last counterargument against selected protection.

Political Economy Issues: The Problem with Democratic Processes

In democratic societies, government representatives and officials are meant to carry out the wishes of the general public. As a result, decisions by the government are influenced by the people they represent. Indeed, one of the reasons “free speech” is so important in democratic societies is to assure that individuals can make their attitudes toward government policies known without fear of reproach. Individuals must be free to inform the government of which policies they approve and of which they disapprove if the government is truly to be a representative of the people. The process by which individuals inform the government of their preferred policies is generally known as lobbying.

In a sense, one could argue that lobbying can help eliminate some of the informational deficiencies faced by governments. After all, much of the information the government needs to make optimal policies is likely to be better known by its constituent firms and consumers. Lobbying offers a process through which information can be passed from those directly involved in production and consumption activities to the officials who determine policies. However, this process may turn out to be more of a problem than a solution.

One of the results of trade theory is that the implementation of trade policies will likely affect income distribution. In other words, all trade policies will generate income benefits to some groups of individuals and income losses to other groups. Another outcome, though, is that the benefits of protection would likely be concentrated—that is, the benefits would accrue to a relatively small group. The losses from protection, however, would likely be dispersed among a large group of individuals.

This outcome was seen clearly in the partial equilibrium analysis of a tariff. When a tariff is implemented, the beneficiaries would be the import-competing firms, which would face less competition for their product, and the government, which collects tariff revenue. The losses would accrue to the thousands or millions of consumers of the product in the domestic economy.

For example, consider a tariff on textile imports being considered by the government of a small, perfectly competitive economy. Theory shows that the sum of the benefits to the government and the firms will be exceeded by the losses to consumers. In other words, national welfare would fall. Suppose the beneficiaries of protection are one hundred domestic textile firms that would each earn an additional $1 million in profit as a result of the tariff. Suppose the government would earn $50 million in additional tariff revenue. Thus the total benefits from the tariff would be $150 million. Suppose consumers as a group would lose $200 million, implying a net loss to the economy of $50 million. However, suppose there are one hundred million consumers of the products. That implies that each individual consumer would lose only $2.

Now, if the government bases its decision for protection on input from its constituents, then it is very likely that protection will be granted even though it is not in the nation’s best interest. The reason is that textile firms would have an enormous incentive to lobby government officials in support of the policy. If each firm expects an extra $1 million, it would make sense for the firms to hire a lobbying firm to help make their case before the government. The arguments to be used, of course, are (1) the industry will decline and be forced to lay off workers without protection, thus protection will create jobs; (2) the government will earn additional revenues that can be used for important social programs; and (3) the tax is on foreigners and is unlikely to affect domestic consumers (number 3 isn’t correct, of course, but the argument is often used anyway). Consumers, on the other hand, have very little individual incentive to oppose the tariff. Even writing a letter to your representative is unlikely to be worth the $2 potential gain. Plus, consumers would probably hear (if they hear anything at all) that the policy will create some jobs and may not affect the domestic price much anyway (after all, the tax is on foreigners).

The implication of this problem is that the lobbying process may not accurately relate to the government the relative costs and benefits that will arise due to the implementation of a trade policy. As a result, the government would likely implement policies that are in the special interests of those groups who stand to accrue the concentrated benefits from protection, even though the policy may generate net losses to the economy as a whole. Thus by maintaining a policy of free trade, an economy could avoid national efficiency losses that could arise with lobbying in a democratic system.

• Selected protection may fail to raise national welfare when foreign country retaliations occur. This is a potential problem when many countries are large in international markets.
• Selected protection with a trade policy is typically second best. A purely domestic policy to correct the market imperfection is often the better, or first-best, policy.
• Selected protection requires detailed information in order to set the policy at a level that will assure an improvement in national welfare. Because the necessary information is often lacking, getting selected protection right may be impossible.
• Selected protection can be captured by special interests in the lobbying process in representative democracies, thereby making it less likely that maximum national welfare will be achieved.
• The term used to describe a potentially welfare-reducing reaction to beggar-thy-neighbor trade policies.
• The term used to describe the lowest-cost policy action that corrects for market distortions or imperfections.
• The often overlooked deficiencies that affect the ability of government to set effective policies.
• The term used to describe the process by which individuals inform the government of their preferred policies.
• Economists applying the theory of the second best would argue that free trade is appropriate in spite of market imperfections because these types of policies are usually first best.

11.6 Free Trade as the “Pragmatically Optimal” Policy Choice

• Understand the modern argument for free trade as a “pragmatically optimal” policy choice.

In summary, the economic argument in support of free trade is a sophisticated argument that is based on the interpretation of results from the full collection of trade theories developed over the past two or three centuries. These theories, taken as a group, do not show that free trade is the best policy for every individual in all situations. Instead, the theories show that there are valid arguments supporting both free trade and protectionism. To choose between the two requires a careful assessment of the pros and cons of each policy regime.

The argument for free trade presented here accepts the notion that free trade may not always be optimal in terms of maximizing economic efficiency. The argument also accepts that free trade may not generate the most preferred distribution of income. In theory, there are numerous cases in which selected protectionism can improve aggregate welfare or could establish a more equal distribution of income. Nevertheless, despite these theoretical possibilities, it remains unclear and perhaps unlikely that selected protectionism could achieve the intended results. First, in many instances, a trade policy is not the best way to achieve the intended improvement in economic efficiency, nor is it likely to be the most efficient way to achieve a more satisfactory distribution of income. Instead, purely domestic tax and subsidy policies dominate. Second, even when a trade policy is the best policy choice, the possibility of retaliations and the likelihood of informational deficiencies or distortions caused by the lobbying process are sufficiently large as to make the intended outcomes unknowable.

In addition, the process of information collection, lobbying, and policy implementation is a costly economic activity. Labor and capital resources are allocated by interest groups attempting to affect policies favorable to them. The government also must expend resources to gather information, to implement and administer policies, and to monitor the effectiveness of these policies. In the United States, the following agencies and groups devote at least some of their time to trade policy implementation: the Office of the United States Trade Representative, the International Trade Commission, the Department of Commerce, the Federal Trade Commission, the Department of Justice, the Congress, and the president, among others. One must wonder whether the cost of this bureaucracy, together with the cost to the private sector to influence the decisions of the government, is worth it, especially when the outcomes are virtually unknowable.

Thus the conclusion reached by many economists is that while free trade may not be “technically optimal,” it remains “pragmatically optimal.” That is, given our informational deficiencies and the other problems inherent in any system of selected protectionism, free trade remains the policy most likely to produce the highest level of economic efficiency attainable.

• While free trade may not be “technically optimal,” it remains “pragmatically optimal”—that is, free trade remains the policy most likely to produce the highest level of economic efficiency that is practically attainable.

Jeopardy Question . As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

• The term used to describe a policy that is relatively easy to implement and has strong positive characteristics but may not be best in all conceivable circumstances.

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Free Trade and Globalization: More than "Just Stuff"

By donald j. boudreaux.

By Donald J. Boudreaux, Nov 1 2010

In fact, though, the case for free trade and globalization is not exclusively, or even ultimately, an economic one. There are two deeper justifications for free trade. One is that people should be allowed to do anything that’s peaceful. The other, which I focus on here, is that free trade civilizes, enlightens, and enriches. Consider, for example, Thomas Cahill’s description of ancient Athens after that city opened itself to trade:

As these familiar clustered settlements, known to agricultural societies throughout the world, grew into cities—with demarcated streets, temples and other official buildings, marketplaces and other gathering centers, import-export warehouses, and docks where exotic cargoes and even more exotic foreigners were unloaded—power shifted somewhat from landed aristocrats to the better-placed urbanites, who controlled trade and who in the diversity of their experience began to think new thoughts. 1

Cahill’s mention of Athens calls to mind my first trip to that city, in 2000. Standing atop the Acropolis looking down on the city of Athens, I saw—amidst the ancient ruins and modern buildings of Athens—a huge balloon in the shape of Ronald McDonald. Gazing at the contrast between the modern world’s most famous clown and some of the most famous ancient ruins, I wondered what archeologists 2,500 years from now will conclude when they uncover the remains of the golden arches. Will those future archeologists realize that McDonald’s was a fast-food chain? Perhaps they’ll mistake it for a church, with Ronald McDonald as the head deity who was worshipped by billions of people around the globe.

Some other tourists, standing beside me and also observing this jarring contrast, were noticeably agitated by the image of Ronald McDonald against the backdrop of this ancient city—floating there for the contemptible purpose of persuading people to buy more burgers and fries. Such agitation is understandable. When tourists visit the Acropolis, they want to be taken back to ancient Greece—to imagine that they’re listening to Pericles’s funeral oration or watching Socrates and Plato debate an important point of philosophy. They don’t want their view of Athens marred by the sight of a large, garish balloon representing modern global commerce.

But what would a resurrected Pericles or Sophocles think? He might find the McDonald’s balloon curiously appropriate. As Cahill emphasizes, international commerce was crucial to Athens’ flourishing not only economically, but also intellectually and culturally.

Discussing ancient Athens, Will Durant described the same happy consequences of trade:

Foreign commerce advances even faster than domestic trade, for the Greek states have learned the advantages of an international division of labor, and each specializes in some product; the shieldmaker, for example, no longer goes from city to city at the call of those who need him, but makes his shields in his shop and sends them out to the markets of the classic world. In one century Athens moves from household economy—wherein each household makes nearly all that it needs—to urban economy—wherein each town makes nearly all that it needs—to international economy—where each state is dependent upon imports, and must make exports to pay for them….

[I]t is this trade that makes Athens rich, and provides, with the imperial tribute, the sinews of her cultural development. The merchants who accompany their goods to all quarters of the Mediterranean come back with changed perspective, and alert and open minds; they bring new ideas and ways, break down ancient taboos and sloth, and replace the familial conservatism of a rural aristocracy with the individualistic and progressive spirit of a mercantile civilization. Here in Athens East and West meet, and jar each other from their ruts. Old myths lose their grasp on the souls of men, leisure rises, inquiry is supported, science and philosophy grow. Athens becomes the most intensely alive city of her time. 2

See also Arts, by Tyler Cowen in the Concise Encyclopedia of Economics and Tyler Cowen on Liberty, Art, Food and Everything Else in Between, a podcast on EconTalk.

Aristotle, Euripides, Thucydides, Grecian urns, the Parthenon, and most of what we rightly celebrate today about the learning and culture of ancient Athens would have been impossible had it not been for that city’s extensive foreign commerce. Economist Tyler Cowen notes: “It is no accident that Classical civilization developed in the Mediterranean, where cultures used sea transport to trade with each other and learn from each other.” 3

Learning and rich culture require wealth—what the abovementioned critics would call “more stuff”—for their growth and sustenance. They also require exposure and openness to different cultures. Such wealth and exposure are promoted by trade, which enables an extensive and productive market-directed division of labor.

The wealth, freedom, and diverse experiences of a commercial culture liberate artists and educators both to be more creative and to cater to the demands of the general population. In a poor society in which only a small elite has wealth and leisure, artists and educators cater only to the elite’s desires. Art forms disliked by elites, as well as knowledge not useful to them, do not thrive. But as trade creates greater and more-widespread wealth, the range of tastes and opportunities that are available to support and influence art and education grows. With the elites no longer being the exclusive supporters of art, the artist who previously found no support for his musical compositions or his poetry might now find sufficient support from the middle classes. Likewise for the teacher who, earlier, found no market for his knowledge.

This trade-fueled process results not only in a more literate society, but also in immense cultural enrichment. Culture takes on many more dimensions: not only orchestral music, but also rock’n’roll, rhythm’n’blues, and rap; not only portraiture and landscapes, but also Andy Warhol soup cans and abstract paintings; novels not only by Virginia Wolff, Marcel Proust, and William Faulkner, but also by Nora Roberts, J.K. Rowling, and Clive Cussler. Movies cater to high tastes, dull tastes, and vulgar tastes. Likewise for music, theater, television, dance, photography, and—more recently—websites and blogs.

Commercial culture not only fuels art forms aimed at different tastes, but also makes high culture more widely available to the non-elite. Not until the 20th century was it possible for anyone to listen to a symphonic performance without actually attending the concert. And such attendance was time-consuming for anyone not living in a city. Today, in contrast, even the poorest and most rural citizens of commercial societies can listen to Bach cantatas, Mozart string quartets, and Verdi operas— along with music by Bruce Springsteen, U2, and Rihanna—just by turning on their radios or iPods. And the performers get it note perfect every time.

One of the chief concerns expressed by anti-globalization activists is that freer trade leads to worldwide cultural homogeneity. Paris, France, according to this view, will become just like Paris, Texas, and both will be dreary. Travel will become pointless. Why travel if every place you can visit differs little from where you are now?

This concern has some merit. A century ago, there were no internationally franchised restaurants in Paris, France or, for that matter, in Paris, Texas. A century ago, residents of neither Omaha, Nebraska nor Birmingham, England could find sushi restaurants near their homes; today, sushi restaurants are all over the Western world. A century ago, blue jeans were not the international fashion that they are today. A century ago, the typical man’s business suit worn by New York lawyers and London bankers was not widely worn in Africa and Asia, as it is today. In many ways, global commerce has indeed made the world more homogeneous.

But look more closely. While the differences between Paris, France and Paris, Texas are fewer than they were in the past, the cultural richness of each of these places today is far greater than it was just a few years ago. For a resident of Paris, Texas, circa 2010, the richness of the cultural smorgasbord available to him or her right at home is vast. A Texan can stay in town and dine on Vietnamese, Italian, or Greek food—or on barbeque. A Texan can listen to German symphonic music or medieval chants or Irish dance music or Edith Piaf—or country and western. A Texan can buy French neckties, English raincoats, and Italian scarves—and cowboy boots. Likewise a Parisian can choose croissants or New-York-style bagels. A mere century ago—even thirty years ago—the cultural diversity of both places was much less than it is today.

While greater cultural richness at home might remove some of the excitement from traveling, it nevertheless creates greater cultural diversity. It expands and enhances the ordinary individual’s cultural experiences. As French economist Daniel Cohen concluded after examining the record of globalization’s effects on culture: “[E]conomic integration does not at all entail the eradication of cultural diversity.” 4

Another, related, concern is that globalization will allow America to overwhelm other cultures with its own. Obviously, the far-flung familiarity with Coca-Cola, Apple computers, blue jeans, and Matt Damon fuels this fear. Again, though, closer inspection reveals a more nuanced and attractive picture. This inspection shows that there is no singular American culture. What’s called “American culture” is an ever-changing amalgam of influences from around the world.

Consider the life of an ordinary American family in the early 21st century. This family has a home filled with electronic products made in Japan and China and a cabinet full of music CDs—which were invented in The Netherlands. Mom and Dad drink coffee grown in Columbia or Ethiopia and brewed in a coffee maker made in Germany. They shower using soap milled in France and wear contact lenses that were invented by a Czech scientist.

The children watch a TV episode of Pokemon, one of Japan’s many successful exports to America. The family shops later that day at the Swedish furniture store Ikea; they drive to Ikea in a car made in Korea and fueled with gasoline purchased from a (Royal Dutch ) Shell station. For dinner, they debate between Mexican, Indian, or Thai. Later that evening, Mom and Dad enjoy wine from South Africa while listening to bossa nova music from Brazil—or, perhaps, they watch a movie starring the Canadian actor Jim Carrey, while their kids lose themselves in the latest Harry Potter novel by British author J.K. Rowling. And before finally turning out the lights, Mom reads several pages from a novel by Russian writer Leo Tolstoy, and Dad finishes a book written by the Peruvian Mario Vargas Llosa.

What’s happening here? Such experiences of a typical American family are routine. They reveal that from the moment ordinary Americans awaken, until they fall asleep, they enjoy comforts, conveniences, culture, knowledge, and entertainment created by people from all around the world.

America’s culture is a gumbo of global influences. It’s also dynamic. The same openness and freedom in America that attract products, people, and ideas from across the globe also ensure that tomorrow’s gumbo will differ from today’s gumbo. A new insight or inspiration from a Dane or a Korean—no less and no more than a new insight or inspiration from a Delawarean or a Kansan—will further diversify and improve the mix. And consumers worldwide will each have a voice in deciding whether or not that new insight or inspiration is worthwhile. (Mexicans and Russians are no more compelled to dine at McDonald’s or to read Tom Clancy than Pennsylvanians and Alaskans are compelled to dine at a Mexican restaurant or to read Vladimir Nabokov.)

So, is it mistaken to label the cultural milieu blooming from Maine to Hawaii as “American”? No. While, in one sense, this culture is global and, hence, resists a nationalist label, in another sense, it is indeed uniquely American. But it is uniquely American in a way that reveals the distorted perspective of those who fret about American cultural hegemony. What justifies labeling this culture “American” is that America contributes the essential openness and freedom for millions of people from hundreds of nations to add their inspirations and efforts to help to fashion it, both as its producers and as its consumers. America’s culture is unique because, in its details, it is not principally an American culture: it is a world culture.

Recognizing that American culture is not a homogeneous glob of fast-food-eating, blue-jeans-wearing, Julia Roberts admirers will not calm the fears of the world’s cultural snobs. One reason that elites look with contempt on popular American culture is probably because it is so vibrant and variegated—and, hence, so attractive to millions of ordinary people. Elites do not and cannot control it. Dramatically reducing the power of elites to control the cultural experiences of ordinary people might well turn out to be America’s great contribution to the 21st century.

Listen to Don Boudreaux’s podcast on Globalization and Trade Deficits on Econtalk, along with podcasts with Don Boudreaux.

The fear that globalization makes the world less interesting culturally is baseless. The effect of free trade is twofold: first, it gives us more prosperity and, second, this prosperity creates diversity and dynamism. Both of these effects are good reasons for opposing the antediluvians who would obstruct international trade.

Thomas Cahill, Sailing the Wine-Dark Sea: Why the Greeks Matter (New York: Anchor Books, 2003), p. 109.

Will Durant, The Life of Greece (New York: MJF Books, 1939), pp. 275-276.

Tyler Cowen, Creative Destruction (Princeton: Princeton University Press, 2002), p. 59.

Daniel Cohen, Globalization and Its Enemies (Cambridge, MA: MIT Press, 2006), p. 136. Cohen continues: “In view of the cultural diversity of the Swedes, the Italians, the Germans, and the French, or even the Portuguese and the Spanish, one should not fear that an integrated global market erases the world’s plurality.”

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Josiah ober on the ancient greek economy.

Arguments against free trade

Many economists support free trade. However, in some circumstances, there are arguments in favour of trade restrictions. These include when developing economies need to develop infant industries and develop their economy.

Reasons for blocking free trade

• Infant industry argument

If developing countries have industries that are relatively new, then at the moment these industries would struggle against international competition. However, if they invested in the industry then in the future they may be able to gain comparative advantage .

• This shows that comparative advantage can change over time.
• Protection would allow developing industries to progress and gain experience to enable them to be able to compete in the future.
• More on infant industry argument
• The Senile industry argument

If industries are declining and inefficient they may require significant investment to make them efficient again. Protection for these industries would act as an incentive to for firms to invest and reinvent themselves. However, protectionism could also be an excuse for protecting inefficient firms

• To diversify the economy

Many developing countries rely on producing primary products in which they currently have a comparative advantage. However, relying on agricultural products has several disadvantages

• Prices can fluctuate due to environmental/weather factors
• Goods have a low-income elasticity of demand. Therefore with economic growth demand will only increase a little.
• Raise revenue for the government.

Import taxes can be used to raise money for the government – however, this will only be a relatively small amount of money

• Help the Balance of Payments

Reducing imports can help the current account as it restricts imports. However, in the long-term, this is likely to lead to retaliation and also cause lower exports so it might soon prove counter-productive.

• Cultural Identity

This is not really an economic argument but more political and cultural. Many countries wish to protect their countries from what they see as an Americanisation or commercialisation of their countries

• Protection against dumping

Dumping occurs when a country has excess stock and so it sells below cost on global markets causing other producers to become unprofitable. The EU sold a lot of its food surplus from the CAP at very low prices on the world market; this caused problems for world farmers because they saw a big fall in their market prices. Other examples include allegations that China has been dumping excess supply of steel on global markets causing other firms to go out of business.

• Environmental

It is argued that free trade can harm the environment because LDC may use up natural reserves of raw materials to export. Also, countries with strict pollution controls may find consumers import the goods from other countries where legislation is lax and pollution allowed.

• However, supporters of free trade would argue that it is up to individual countries to create environmental legislation

Economists against free trade

Friedrich List , The National System of Political Economy (1841)

List made a case for tariffs and protectionism. List argued that moderate tariffs could be justified at certain times in economic development. List also accused developed countries of pursuing a degree of protection when they needed it but then trying to force free-trade on their competitors when they needed some protection. List used the phrase ‘“kicking away the ladder” – to describe this scenario.

To List, the aim is not just wealth but to improve a country’s means of production. Moderate tariffs can enable countries to develop new manufacturing industries.

‘In order to allow freedom of trade to operate naturally, the less advanced nations must first be [xxv] raised by artificial measures to that stage of cultivation to which the English nation has been artificially elevated.”(p. 107)

“In the first stage they must adopt free trade with the more ad­vanced na­tions as a means of rais­ing them­selves from a state of bar­barism and of mak­ing ad­vances in agri­cul­ture. In the sec­ond stage they must re­sort to com­mer­cial re­stric­tions to pro­mote the growth of man­ufac­tures, fish­eries, nav­iga­tion, and for­eign trade. In the last stage, af­ter reach­ing the high­est de­gree of wealth and pow­er, they must grad­ual­ly re­vert to the prin­ci­ple of free trade and of un­re­strict­ed com­pe­ti­tion in the home as well as in for­eign mar­kets, so that their agri­cul­tur­ists, man­ufac­tur­ers, and mer­chants may be pre­served from in­do­lence and stim­ulat­ed to re­tain the suprema­cy which they have ac­quired.”

Joseph Stiglitz

Stiglitz is a modern economist concerned that the benefits of globalisation are inequitably distributed. Stiglitz argues free trade deals like recent TIPP are geared towards powerful multinationals. Stiglitz argues

“Theories of free trade assume efficient markets but in practise there are immobilities for labour to move from old (inefficient industries) to new ones. “The older theories, for instance, simply ignored risk, and assumed that workers could move seamlessly between jobs… But when there is a high level of unemployment, and especially when a large percentage of the unemployed have been out of work long-term (as is the case now), there can’t be such complacency.” ( On wrong side of globalization at NYT)

Modern trade deals are often about reducing regulations (regulations on the protection of labour, environment and consumers) and increasing power of multinationals.

Ha-Joon Chan is a modern economist who has been critical of free trade. In particular, he has updated similar theories of Fredrich List is noting how many developed economies used protectionism in their economic development. His books include Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.

• Benefits of Free Trade
• Mercantilism

• | International Freedom and Trade International Freedom and Trade
• | Policy Briefs Policy Briefs
• | May 23, 2018

The Benefits of Free Trade: Addressing Key Myths

• Donald J. Boudreaux
• Download Publication PDF

Free trade increases prosperity for Americans—and the citizens of all participating nations—by allowing consumers to buy more, better-quality products at lower costs.

The growing rhetoric about imposing tariffs and limiting freedom to trade internationally reflects a resurgence of old arguments that stay alive in large part because the benefits of free international trade are often diffuse and hard to see, while the benefits of shielding specific groups from foreign competition are often immediate and visible. This illusion fuels the common perception that free trade is detrimental to the American economy. It also tips the scales in favor of special interests seeking protection from foreign competition. As a result, the federal government currently imposes thousands of tariffs, quotas, and other barriers to trade.

Restrictions on foreign trade all too often harm the very people they aim to protect: American consumers and producers. Trade restrictions limit the choices of what Americans can buy; they also drive up the prices of everything from clothing and groceries to the materials manufacturers use to make everyday products. Moreover, lower-income Americans generally bear a disproportionate share of these costs. Trade treaties increase freedom to trade and do not result in loss of sovereignty; they are part and parcel of wider international relations and they are not new.

The Truths of Free Trade

Free trade increases prosperity for Americans—and the citizens of all participating nations—by allowing consumers to buy more, better-quality products at lower costs. It drives economic growth, enhanced efficiency, increased innovation, and the greater fairness that accompanies a rules-based system. These benefits increase as overall trade—exports and imports—increases.

• Free trade increases access to higher-quality, lower-priced goods. Cheaper imports, particularly from countries such as China and Mexico, have eased inflationary pressure in the United States. Prices are held down by more than 2 percent for every 1 percent share in the market by imports from low-income countries like China, which leaves more income for Americans to spend on other products.
• Free trade means more growth. At least half of US imports are not consumer goods; they are inputs for US-based producers, according to economists from the Bureau of Economic Analysis. Freeing trade reduces imported-input costs, thus reducing businesses’ production costs and promoting economic growth.
• Free trade improves efficiency and innovation. Over time, free trade works with other market processes to shift workers and resources to more productive uses, allowing more efficient industries to thrive. The results are higher wages, investment in such things as infrastructure, and a more dynamic economy that continues to create new jobs and opportunities.
• Free trade drives competitiveness. Free trade does require American businesses and workers to adapt to the shifting demands of the worldwide marketplace. But these adjustments are critical to remaining competitive, and competition is what fuels long-term growth.
• Free trade promotes fairness. When everyone follows the same rules-based system, there is less opportunity for cronyism, or the ability of participating nations to skew trade advantages toward favored parties. In the absence of such a system, bigger and better-connected industries can more easily acquire unfair advantages, such as tax and regulatory loopholes, which shield them from competition.

Myth vs. Reality

1. Myth: More exports mean more wealth.

Reality: It is the total level of trade—exports and imports—that most accurately reflects American prosperity. Prosperity is defined by the breadth and variety of what Americans are able to consume. More exports increase wealth only because they allow Americans to buy more imports and give non-Americans greater incentives to invest in America, helping the US economy grow. Restricting imports leaves Americans worse off.

• Poorer Americans suffer more from tariffs than higher-income people. Not only do they spend more of their income on consumption goods, many of the goods they consume are subject to higher tariffs than more expensive goods of the same type.
• For example, imported cheap sneakers can face a tariff as high as 60 percent, while men’s leather dress shoes are subject to an 8.5 percent tariff. Similarly, plain drinking glasses face a tariff of nearly 30 percent, while expensive crystal glasses are taxed at 3 percent.

2. Myth: Free trade means jobs go overseas.

Reality: Free trade does not create more jobs, but neither does protectionism. Free trade may reduce jobs in inefficient industries, but it frees up resources to create jobs in efficient industries, boosting overall wages and improving living standards. Protectionism, in contrast, attempts to protect jobs that the market will not sustain, at the expense of more innovative industries.

• Much of the change in the labor force is not the result of free trade but of innovation. New technology, such as apps on mobile devices, has displaced a staggering variety of products, including radios, cameras, alarm clocks, calculators, compact discs, DVDs, carpenters’ levels, tape measures, tape recorders, blood-pressure monitors, cardiographs, flashlights, and file cabinets.
• Using protectionist policies to “save” a job comes at enormous cost, as opportunities shrink and input costs swell for industries downstream.

3. Myth: Restrictions on trade help Americans.

Reality: The only beneficiaries of trade restrictions are the inefficient firms and special interests that lobby for these protections against competition.

• Despite receiving protection from foreign competition for many decades, large firms have steadily left the US steel industry because of high fixed costs and competition from smaller firms. Tariffs on steel increase costs in steel-consuming industries, which employ almost 13 million Americans, compared to the 140,000 Americans employed in the steelmaking industry.
• Other countries often retaliate against US tariffs. Tariffs on Chinese-made solar panels between 2012 and 2015 resulted in China imposing tariffs on American polysilicon, raising the cost of solar equipment and reducing employment opportunities in both nations.

4. Myth: US trade deficits are bad for Americans.

Reality: US trade deficits generally are good for Americans.

The trade deficit is not debt. A growing trade deficit, despite its misleading name, is good for the economy. It is typically a signal that global investors are confident in America’s economic future. The US trade deficit might be larger than it would otherwise be if a trading partner chooses to keep the price of its currency artificially low, but this practice harms the trading partner, not the United States.

• America’s trade deficit increases whenever non-Americans choose to increase the amount they invest in the United States. Dollars that leave the United States as part of the trade deficit must come back as a “capital account surplus”—that is, the net investment funds flowing into the United States. More investment means expansion of existing businesses, more new businesses, higher worker productivity, and more output-enhancing activities, such as research and development, all of which increase prosperity.
• So-called “currency manipulation” by a trading partner does not harm the American economy. For example, a lower price of the yuan makes Chinese goods cheaper for American consumers, conferring a real benefit on the United States. Keeping the price of the yuan lower through monetary policy, however, does not lower the real costs of the resources and outputs exported by the Chinese people, who also face higher prices for American imports. An undervalued yuan—assuming this undervaluation to be real rather than fanciful—benefits Americans at the expense of the Chinese.

5. Myth: Trade treaties require a surrender of sovereignty.

Reality: Trade treaties enhance freedom.

• Nation-states routinely ratify treaties on a range of issues, including human rights, treatment of prisoners, and territorial waters, as well as international trade and financial transactions. Such cooperation is the basis of public international law. Trade treaties are particularly valuable because they contain provisions that help governments avoid the worst damage that protectionism could inflict on their people.
• The “most-favored nation” and “national treatment” clauses of the General Agreement on Tariffs and Trade require that nations treat all trading partners alike and do not discriminate between domestic and imported goods. This requirement of reciprocity helps assure governments that gains from trade will be available for everyone.

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The Arguments Against Free Trade

• U.S. Economy
• Supply & Demand
• Archaeology
• Ph.D., Business Economics, Harvard University
• M.A., Economics, Harvard University
• B.S., Massachusetts Institute of Technology

Economists conclude, under some simple assumptions, that allowing free trade in an economy improves welfare for society overall. If free trade opens up a market to imports, then consumers benefit from the low-priced imports more than producers are hurt by them. If free trade opens up a market for exports, then producers benefit from the new place to sell more than consumers are hurt by higher prices.

Nonetheless, there are a number of common arguments made against the principle of free trade. Let's go through each of them in turn and discuss their validity and applicability.

The Jobs Argument

One of the main arguments against free trade is that, when trade introduces lower cost international competitors, it puts domestic producers out of business. While this argument isn't technically incorrect, it is short-sighted. When looking at the free trade issue more broadly, on the other hand, it becomes clear that there are two other important considerations.

First, the loss of domestic jobs is coupled with reductions in prices of goods that consumers buy, and these benefits shouldn't be ignored when weighing the tradeoffs involved in protecting domestic production versus free trade.

Second, free trade not only reduces jobs in some industries, but it also creates jobs in other industries. This dynamic occurs both because there are usually industries where the domestic producers end up being exporters (which increases employment) and because the increased income held by foreigners who benefited from free trade is at least partly used to buy domestic goods, which also increases employment.

The National Security Argument

Another common argument against free trade is that it is risky to depend on potentially hostile countries for vital goods and services. Under this argument, certain industries should be protected in the interests of national security. While this argument is also not technically incorrect, it is often applied much more broadly than it should be in order to preserve the interests of producers and special interests at the expense of consumers.

The Infant-Industry Argument

In some industries, pretty significant learning curves exist such that production efficiency increases rapidly as a company stays in business longer and gets better at what it is doing. In these cases, companies often lobby for temporary protection from international competition so that they can have a chance to catch up and be competitive.

Theoretically, these companies should be willing to incur short-term losses if the long-term gains are substantial enough, and thus shouldn't need assistance from the government. In some cases, however, companies are liquidity constrained enough that it can't weather the short-term losses, but, in those cases, it makes more sense for governments to provide liquidity via loans than to provide trade protection.

The Strategic-Protection Argument

Some proponents of trade restrictions argue that the threat of tariffs, quotas, and the like can be used as a bargaining chip in international negotiations. In reality, this is often a risky and unproductive strategy, largely because threatening to take action that is not in a nation's best interest is often viewed as a non-credible threat.

The Unfair-Competition Argument

People often like to point out that it's not fair to allow competition from other nations because other countries don't necessarily play by the same rules, have the same costs of production, and so on. These people are correct in that it's not fair, but what they don't realize is that the lack of fairness actually helps them rather than hurts them. Logically, if another country is taking actions to keep its prices low, domestic consumers benefit from the existence of low-priced imports.

Granted, this competition can put some domestic producers out of business, but it's important to remember that consumers benefit more than producers lose in exactly the same way as when other countries are playing "fair" but happen to be able to produce at lower cost anyway.

In summary, the typical arguments made against free trade are generally not convincing enough to outweigh the benefits of free trade except in very particular circumstances.

• 50 Argumentative Essay Topics
• What Is Free Trade? Definition, Theories, Pros, and Cons
• History of the North American Free Trade Agreements
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• The Economic Effect of Tariffs
• A Mixed Economy: The Role of the Market
• The Logic of Collective Action
• Introduction to Price Supports
• The Critical View on Global Capitalism
• The Globalization of Capitalism
• Argument Against the Person - Argumentum Ad Hominem
• Absolute and Comparative Advantage
• Product Dumping: A Danger to Foreign Markets
• Logical Fallacies: Begging the Question
• The Economics of Price Gouging
• Understanding Subsidy Benefit, Cost, and Market Effect

Home — Essay Samples — Economics — Global Economy — Free Trade

Essays on Free Trade

The importance of writing an essay on free trade.

Writing an essay on free trade is important because it allows individuals to critically analyze and understand the impact of free trade on the global economy. Free trade is a complex and controversial topic that affects various aspects of society, including economic growth, job creation, and international relations. By writing an essay on free trade, individuals can deepen their knowledge and understanding of the subject and contribute to the ongoing discourse on the topic.

When writing an essay on free trade, it is important to consider the following tips:

• Research extensively: Before writing the essay, it is crucial to conduct thorough research on the topic of free trade. This includes understanding the principles of free trade, its historical context, and its impact on different countries and industries.
• Provide balanced arguments: Free trade is a polarizing issue, with proponents and critics offering differing viewpoints. It is essential to present a balanced perspective in the essay, considering both the advantages and disadvantages of free trade.
• Use credible sources: When writing about free trade, it is important to use reliable and credible sources to support your arguments. This includes academic journals, government publications, and reputable news outlets.
• Consider real-world examples: Incorporating real-world examples of free trade agreements and their outcomes can add depth and relevance to the essay. This can include case studies of countries that have implemented free trade policies and the effects on their economies.
• Engage with opposing viewpoints: Acknowledging and addressing opposing viewpoints on free trade demonstrates a comprehensive understanding of the topic. It is important to engage with counterarguments and provide a well-reasoned response.

Writing an essay on free trade is important for developing a deeper understanding of the topic and contributing to the ongoing dialogue surrounding free trade policies. By following the aforementioned tips, individuals can effectively craft a well-researched and balanced essay on free trade.

• The impact of free trade agreements on developing countries
• The benefits of free trade for the global economy
• The role of free trade in promoting economic growth and development
• The relationship between free trade and income inequality
• The effect of free trade on job creation and unemployment
• The impact of free trade on environmental sustainability
• The role of free trade in promoting innovation and technological advancement
• The relationship between free trade and consumer welfare
• The benefits of free trade for small and medium-sized enterprises
• The role of free trade in promoting competition and market efficiency
• The impact of free trade on global supply chains and logistics
• The relationship between free trade and economic stability
• The effects of protectionism on free trade and the global economy
• The role of free trade in reducing poverty and promoting social development
• The impact of free trade on global food security and agricultural production
• The relationship between free trade and intellectual property rights
• The benefits of free trade for the services sector
• The role of free trade in promoting cross-border investment and capital flows
• The impact of free trade on international relations and geopolitics
• The relationship between free trade and cultural diversity
• The effects of trade liberalization on developing countries' industrial and agricultural sectors
• The role of free trade in promoting regional economic integration
• The impact of free trade on the global financial system
• The relationship between free trade and human rights
• The benefits of free trade for reducing the cost of living for consumers

Free trade is a concept that has been debated for centuries. It refers to the absence of government interference in the exchange of goods and services between countries, allowing for the unrestricted flow of goods and services across borders. Proponents of free trade argue that it promotes economic growth, increases efficiency, and lowers prices for consumers. Critics, on the other hand, argue that it can lead to job loss, income inequality, and environmental degradation.

One of the main benefits of free trade is its potential to boost economic growth and development. By allowing for the unrestricted flow of goods and services, countries can specialize in the production of goods and services in which they have a comparative advantage, leading to increased productivity and output. This can result in higher living standards and improved quality of life for citizens.

Additionally, free trade can lead to lower prices for consumers. When countries engage in free trade, they can access a wider range of goods and services at lower prices than if they were produced domestically. This can lead to increased consumer welfare and a higher standard of living.

Furthermore, free trade can promote innovation and technological advancement. When countries are able to access a wider range of goods and services, they can benefit from new ideas and technologies that can improve productivity and efficiency. This can lead to increased competitiveness and economic growth.

However, critics of free trade argue that it can lead to job loss and income inequality. When countries engage in free trade, some industries may suffer from increased competition from foreign producers, leading to job displacement and lower wages for workers. This can lead to increased income inequality and social unrest.

Moreover, free trade can lead to environmental degradation. When countries engage in free trade, they may prioritize economic growth over environmental sustainability, leading to increased pollution and natural resource depletion. This can have negative impacts on the environment and public health.

In , free trade has both benefits and drawbacks. While it can promote economic growth, lower prices for consumers, and increase innovation, it can also lead to job loss, income inequality, and environmental degradation. It is important for policymakers to carefully consider the potential impacts of free trade and to implement policies that can mitigate its negative effects.

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Essay on Free Trade | International Economics

Here is an essay on ‘Free Trade’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Free Trade’ especially written for school and college students.

Essay # 1. Meaning of Free Trade :

The policy of free trade is one which does not impose any tariff or non-tariff restrictions upon free exchange of goods and services between the trading countries. Such a policy permits a country to buy and consume those goods, which it either cannot produce at all or can produce only at a higher cost. Similarly it can dispose of in foreign markets, without encountering any restriction or hindrances, those products or services in the creation of which it has the comparative cost advantage.

According to Adam Smith, the policy of free trade is “a system of commercial policy which draws no distinction between the domestic and foreign commodities and thus neither imposes additional burden on the latter nor grants any special favour to the former.” The free trade, therefore, signifies a non-discriminatory trade policy that places no artificial barriers upon free international movement of goods and services. In the words of Haberler, “…. free trade is the external trade system of liberalism which opposes every interference by the state with the free play of economic forces.”

The essence of free trade, in the opinion of Jagdish Bhagwati, is the complete absence of restrictions upon free exchange of goods and services. Free trade, to quote him, is the complete “absence of tariffs, quotas, exchange restrictions, taxes and subsidies on production, factor use and consumption.”

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In this regard, R.G. Lipsey writes, “…… a world of free trade would be one with no tariffs and no restrictions of any kind on importing or exporting. In such a world, a country would import all those commodities that it could buy from abroad at a delivered price lower than the cost of producing them at home.”

A policy of free trade, no doubt, implies an absence of trade barriers but the imposition of import duties for the consideration of obtaining revenues may be consistent with free trade, when these are not meant either to provide protection to home industries or to discriminate against the cheap imports from abroad. It may be explained through an illustration. Suppose the home country A imposes an import tariff of 15 percent on the product of foreign country B. The latter has cost advantage over country A, say by 25 percent.

In such a situation, country B continues to enjoy cost advantage over A despite the imposition of import levy. The flow of goods from B to A can still take place unhampered. At the same time, country A becomes able to secure revenues from imports. The import duty, in such a case, does not violate the principle of free trade. In brief, the policy of free trade means non-resort to any direct or indirect restraint upon the international flow of goods and services.

Essay # 2. Arguments for Free Trade:

The philosophy of laissez faire in the field of international trade came into prominence as a reaction to Mercantilist advocacy of trade barriers. The powerful voice in support of free trade was raised by Locke, Hume and Adam Smith. A renowned line of economic thinkers, including Ricardo, J.S. Mill, Bastable, Marshall and Haberler lent strong support to the cause of free international trade.

The main arguments in support of free trade are as follows:

(i) Maximisation of World Output:

If there is no tariff or non-tariff restriction upon international trade, every country is likely to specialise in the production and export of that commodity in which it has the greater comparative advantage or the least comparative disadvantage. The benefits of specialisation and division of labour can become available to all the trading countries and they will be able to make the optimum use of their productive resources.

As a consequence, the world output is likely to get maximised. When each trading country produces those commodities in the production of which it is most suited and imports those commodities, which it can procure more cheaply from abroad rather than producing them itself, the real incomes of all the trading countries are likely to rise. In this context Ellsworth remarked, “…. Since the income of any community or nation is large just in proportion to the extent to which it specialises, the greater possible freedom of trade is justified.”

(ii) Optimum Use of Resources:

The free trade leads not only to specialisation in production but also to factor specialisation. The diversion of all scarce productive resources to such industries where their productive efficiency is the maximum implies their ideal or optimum utilisation. In the conditions of free trade, there is little possibility of under-utilisation or wastage of scarce resources. Any scarcity of productive factors, at the same time, can be easily off-set through their import from foreign countries. Thus free trade paves the way for the optimisation of productive factors throughout the world.

(iii) Large Factor Incomes:

In the condition of free trade, the factor units can easily and quickly move either within the same country or between different countries for securing larger remuneration for their services. It is, therefore, possible that factor incomes such as wages, rents, interests and profits are higher under free trade than otherwise.

(iv) Optimisation of Consumption:

The free international trade enables a country to import products from the cheapest market and relieve the domestic shortages of goods. It also provides opportunities for the consumers to import and use superior varieties of products. The increased availability of consumable goods of better varieties at low prices assures the optimisation of consumption in the trading countries.

(v) Enlargement of Market:

The absence of restrictions upon trade results in an enlargement of the size of market as every country can dispose of its surplus production in foreign markets. Products of all countries can have global demand. The extension in the size of market gives strong inducement to raise production and investment, to introduce improved techniques, and to introduce new, superior and cheaper varieties of products.

(vi) Check on Monopolies:

Free trade implies free competition. The producers from different countries try to expand their sales in the markets of other countries. The price competition and introduction of newer varieties of products prevent the emergence of exploitative monopolies. In this connection, it must be pointed out that free trade does not provide a complete safeguard from monopolies. Even under free trade, there can be emergence of natural monopolies or strong local or international cartels capable of restricting output and manipulating prices.

(vii) Educative Effects:

Haberler explained that free international trade can inculcate in the population of a country such qualities as competit­iveness, inventiveness, urge for excellence, efficiency, acquisition of advanced skills in production, management and organisation. These educative effects emanating from free trade make the trading countries to achieve higher production frontiers.

(viii) Accelerated Development:

Haberler has greatly emphasized upon free trade as a means for accelerating the process of economic transformation in the developing countries. According to him, free trade can contribute in the process of growth in different ways.

Firstly, it enables the unrestricted import of raw materials and capital goods, which are essential for industrial expansion.

Secondly, free trade assists in an easy transfer of advanced technical know-how and entrepreneurship from the advanced to the less developed countries.

Thirdly, free trade facilitates large scale international capital movements to speed up the process of growth.

Fourthly, free trade promotes competition, efficiency and productivity and can create such capacities in the poor countries, which enable them to achieve higher levels of production, employment and income.

Essay # 3. Arguments against Free Trade :

Despite strong classical advocacy of free trade, the world drifted away from free and unrestricted trade. The less developed countries have been viewing it as an instrument of colonial exploitation. Even the advanced countries have been taking recourse to restrictions upon international trade for the realisation of their economic and trade interests. A number of theoretical and practical objections are raised against the policy of free trade.

The main arguments against it are as follows:

(i) Absence of Pre-Requisites of Free Trade:

The theoretical objection against the policy of free trade is that conditions necessary for it do not actually exist in the real life. Some of pre-requisites of free trade policy are prefect competition, perfect factor mobility, free working of price system and laissez faire. The absence of these requirements invalidates this policy altogether.

(ii) Cut-Throat Competition:

The free international trade leads to chaotic trade conditions because the advanced countries try to capture more and more foreign markets for their products by dumping their products at very low prices in other countries. This intense competition has serious destabilising effects particularly upon the LDC’s. For instance, flourishing Indian handicrafts were completely wiped out in the nineteenth century on account of relentless competition from the British mill-made manufactures.

(iii) Lop-Sided Development:

Free trade underlines the specialisation in production and export in these industries in case of which a given country has comparative cost advantage over others. The adoption of this principle means that other industries and sectors should remain undeveloped. The less- developed countries, which have comparative advantage in agriculture, will remain condemned as agricultural countries alone. Such lop-sided or unbalanced growth has serious economic and social consequences.

(iv) Excessive Foreign Dependence:

When a country adopts a policy of free trade on the basis of the principle of comparative cost advantage, it becomes excessively dependent upon the foreign country for the disposal of its production and for the import of varied products. Such an excessive dependence is detrimental to its interests both in the times of peace and war.

(v) International Transmission of Fluctuations:

The free trade results in the transmission of prosperity or depression from one country to another. For instance, if country A is plagued by recession or depression, the fall in purchasing power of the people causes a reduction in its imports. The reduced imports signify the reduction in the exports of country B.

A decline in exports of country B causes a reduction in income. Thus, the fluctuations get transmitted from one country to the other and an economic crisis assumes global proportions. The trade restrictions can effectively prevent such a possibility.

(vi) Import of Harmful Products:

Where there are no restrictions upon trade, there is a danger of large inflow of harmful and sub-standard products from abroad. The unrestricted import of such commodities is injurious for the health and efficiency of the people. It will have the effect of reducing the welfare of the society. In view of such adverse implications of free trade on social welfare function, the countries, at some stage, feel compelled to adopt restrictive measures.

(vii) Emergence of Monopolies:

The free international trade and intense foreign competition eliminate many business firms. Consequently, local monopolies or international cartels emerge. Their manipulation of supply and price to maximise profits results in the exploitation of people and hinders the free working of price system. The possibility of emergence of monopolies necessitates the imposition of restrictive measures upon trade.

(viii) Detrimental for Development:

Haberler’s viewpoint that free trade stimulates development process in LDC’s is difficult to be accepted by their economists and statesmen. The international exploitation of the raw materials and markets of the poor countries by the advanced countries through free trade for the last two centuries is ample evidence of the fact that it has serious adverse effects upon the growth process of the former. The development of infant industries and subsequent industrial diversification are unlikely to take place unless effective restraints upon foreign imports are enforced by the less developed countries.

In view of the reasons given above, both advanced and less developed countries have continued to drift away from the policy of unrestricted international trade since the First World War. No doubt, the international monetary and trade organisations have their avowed goal of re­establishing restriction-free trade, much success has, however, not been achieved in this direction.

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Free Trade Agreement (FTA): Definition, How It Works, and Example

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is a Free Trade Agreement (FTA)?

A free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them. Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.

The concept of free trade is the opposite of trade protectionism or economic isolationism.

Key Takeaways

• Free trade agreements reduce or eliminate barriers to trade across international borders.
• Free trade is the opposite of trade protectionism.
• In the U.S. and the E.U., free trade agreements do not come without regulations and oversight.

Investopedia / Julie Bang

How a Free Trade Agreement (FTA) Works

In the modern world, free trade policy is often implemented by means of a formal and mutual agreement of the nations involved. However, a free-trade policy may simply be the absence of any trade restrictions.

A government doesn't need to take specific action to promote free trade. This hands-off stance is referred to as “ laissez-faire trade” or trade liberalization.

Governments with free-trade policies or agreements in place do not necessarily abandon all control of imports and exports or eliminate all protectionist policies. In modern international trade, few free trade agreements (FTAs) result in completely free trade.

The benefits of free trade were outlined in "On the Principles of Political Economy and Taxation," published by economist David Ricardo in 1817.

For example, a nation might allow free trade with another nation, with exceptions that forbid the import of specific drugs not approved by its regulators, animals that have not been vaccinated, or processed foods that do not meet its standards.

It might also have policies in place that exempt specific products from tariff-free status in order to protect home producers from foreign competition in their industries.

The Economics of Free Trade

In principle, free trade on the international level is no different from trade between neighbors, towns, or states.

However, it allows businesses in each country to focus on producing and selling the goods that best use their resources while other businesses import goods that are scarce or unavailable domestically. That mix of local production and foreign trade allows countries to experience faster growth while better meeting the needs of their consumers.

This view was first popularized in 1817 by economist David Ricardo in his book, "On the Principles of Political Economy and Taxation." He argued that free trade expands the diversity and lowers the prices of goods available in a nation while better exploiting its homegrown resources, knowledge, and specialized skills.

Mercantilism

Prior to the 1800s, global trade was dominated by the theory of mercantilism. This theory placed priority on having a favorable balance of trade relative to other countries and accumulating more gold and silver.

In order to attain a favorable balance of trade, countries would often place trade barriers like taxes and tariffs to discourage their residents from purchasing foreign goods. This incentivized consumers to purchase locally-made products, thereby supporting domestic industries.

Comparative Advantage

Ricardo introduced the law of comparative advantage , which states that countries can attain the maximum benefits through free trade. Ricardo demonstrated that if countries prioritize producing the goods that they can produce more cheaply than other countries (i.e., where they have a comparative advantage) they will be able to produce more goods in total than they would by limiting trade.

Advantages and Disadvantages of Free Trade

Rapid development.

Free trade has allowed many countries to attain rapid economic growth. By focusing on exports and resources where they have a strong comparative advantage, many countries have been able to attract foreign investment capital and provide relatively high-paying jobs for local workers.

Lower Global Prices

For consumers, free trade creates a competitive environment where countries strive to provide the lowest possible prices for their resources. This in turn allows manufacturers to provide lower prices for finished goods, ultimately increasing the buying power for all consumers.

Unemployment and Business Losses

However, there are economic losers when a country opens its borders to free trade. Domestic industries may be unable to compete with foreign competitors, causing local unemployment. Large-scale industries may move to countries with lax environmental and labor laws, resulting in child labor or pollution.

Increased Dependency on the Global Market

Free trade can also make countries more dependent on the global market. For example, while the prices of some goods may be lower in the world market, there are strategic benefits for a country that produces those goods domestically. In the event of a war or crisis, the country may be forced to rebuild these industries from scratch.

Free Trade Pros and Cons

Allows consumers to access the cheapest goods on the world market.

Allows countries with relatively cheap labor or resources to benefit from foreign exports.

Under Ricardo's theory, countries can produce more goods collectively by trading on their respective advantages.

Competition with foreign exports may cause local unemployment and business failures.

Industries may relocate to jurisdictions with lax regulations, causing environmental damage or abusive labor practices.

Countries may become reliant on the global market for key goods, leaving them at a strategic disadvantage in times of crisis.

Public Opinion on Free Trade

Free trade divides economists and the general public. Research suggests that economists in the U.S. support free-trade policies at significantly higher rates than the general public.

In fact, the American economist Milton Friedman said: “The economics profession has been almost unanimous on the subject of the desirability of free trade.”

Free-trade policies have not been as popular with the general public. The key issues include unfair competition from countries where lower labor costs allow price-cutting and a loss of good-paying jobs to manufacturers abroad.

The call on the public to "Buy American" may get louder or quieter with the political winds, but it never goes silent.

The View From Financial Markets

Not surprisingly, the financial markets see the other side of the coin. Free trade is an opportunity to open another part of the world to domestic producers.

Moreover, free trade is now an integral part of the financial system and the investing world. American investors now have access to most foreign financial markets and to a wider range of securities, currencies, and other financial products.

However, completely free trade in the financial markets is unlikely in our times. There are many supranational regulatory organizations for world financial markets, including the Basel Committee on Banking Supervision , the International Organization of Securities Commission (IOSCO) , and the Committee on Capital Movements and Invisible Transactions.

Examples of Free Trade Agreements

European union.

The European Union is a notable example of free trade today. The member nations form an essentially borderless single entity for the purposes of trade, and the adoption of the euro by most of those nations smooths the way further.

It should be noted that this system is regulated by a central bureaucracy that must manage the many trade-related issues that come up between representatives of member nations.

U.S. Free Trade Agreements

The United States currently has a number of free trade agreements in place. These include multi-nation agreements such as the United States-Mexico-Canada Agreement (USMCA), which covers Canada and Mexico, and the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR), which includes Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. There are also separate trade agreements with nations from Australia to Peru.

Collectively, these agreements mean that about half of all industrial goods entering the U.S. come in free of tariffs, according to government figures. The average import tariff on industrial goods is 2%.

All these agreements collectively still do not add up to free trade in its most laissez-faire form. American special interest groups have successfully lobbied to impose trade restrictions on hundreds of imports including steel, sugar, automobiles, milk, tuna, beef, and denim.

Why Were Free Trade Zones Created in China?

Starting in 2013, China began establishing free trade zones around key ports and coastal areas. These were areas where national regulations were relaxed in order to facilitate foreign investment and business development.

What Is a Free Trade Area?

A free trade area is a group of countries that have agreed to mutually lower or eliminate trade barriers for trade within the area. This allows participating countries to benefit from reduced tariffs while maintaining their existing protections for trade with countries outside of the area.

What Are the Arguments Against Free Trade?

Opponents often assert that free trade invites foreign competition with domestic industries, causing job loss and harming key industries. In some cases, free trade causes manufacturers to move their operations to countries with fewer regulations, rewarding companies that cause pollution or use abusive labor practices. In other cases, countries with weak intellectual property laws may steal technology from foreign companies.

Free trade refers to policies that permit inexpensive imports and exports, without tariffs or other trade barriers. In a free trade agreement, a group of countries agrees to lower their tariffs or other barriers to facilitate more exchanges with their trading partners. This allows all countries to benefit from lower prices and access to one another's resources.

McMaster University. " On the Principles of Political Economy and Taxation ."

The Wilson Center. " Chapter 3: Trade Agreements and Economic Theory ."

Federal Reserve Bank Of St. Louis. " Free Trade: Why Are Economists and Noneconomists So Far Apart? ," Page 1.

Kansas State University. " Landon Lecture (April 27, 1978) Free Trade: Producer Versus Consumer ."

European Union. " The European Union, What It Is and What It Does ."

European Union. " Trade ."

European Union. " Types of Institutions and Bodies ."

U.S. Customs and Border Protection. " Central-America-Dominican Republic Free Trade Agreement (CAFTA-DR) ."

U.S. Customs and Border Protection. " Free Trade Agreements ."

U.S. Customs and Border Protection. " U.S. - Mexico - Canada Agreement (USMCA) ."

Office of the United States Trade Representative. " Industrial Tariffs ."

Government of Canada. " Free Trade Zones in China ."

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Why the Pandemic Probably Started in a Lab, in 5 Key Points

By Alina Chan

Dr. Chan is a molecular biologist at the Broad Institute of M.I.T. and Harvard, and a co-author of “Viral: The Search for the Origin of Covid-19.”

This article has been updated to reflect news developments.

On Monday, Dr. Anthony Fauci returned to the halls of Congress and testified before the House subcommittee investigating the Covid-19 pandemic. He was questioned about several topics related to the government’s handling of Covid-19, including how the National Institute of Allergy and Infectious Diseases, which he directed until retiring in 2022, supported risky virus work at a Chinese institute whose research may have caused the pandemic.

For more than four years, reflexive partisan politics have derailed the search for the truth about a catastrophe that has touched us all. It has been estimated that at least 25 million people around the world have died because of Covid-19, with over a million of those deaths in the United States.

Although how the pandemic started has been hotly debated, a growing volume of evidence — gleaned from public records released under the Freedom of Information Act, digital sleuthing through online databases, scientific papers analyzing the virus and its spread, and leaks from within the U.S. government — suggests that the pandemic most likely occurred because a virus escaped from a research lab in Wuhan, China. If so, it would be the most costly accident in the history of science.

Here’s what we now know:

1 The SARS-like virus that caused the pandemic emerged in Wuhan, the city where the world’s foremost research lab for SARS-like viruses is located.

• At the Wuhan Institute of Virology, a team of scientists had been hunting for SARS-like viruses for over a decade, led by Shi Zhengli.
• Their research showed that the viruses most similar to SARS‑CoV‑2, the virus that caused the pandemic, circulate in bats that live r oughly 1,000 miles away from Wuhan. Scientists from Dr. Shi’s team traveled repeatedly to Yunnan province to collect these viruses and had expanded their search to Southeast Asia. Bats in other parts of China have not been found to carry viruses that are as closely related to SARS-CoV-2.

The closest known relatives to SARS-CoV-2 were found in southwestern China and in Laos.

Large cities

Mine in Yunnan province

Cave in Laos

South China Sea

The closest known relatives to SARS-CoV-2

were found in southwestern China and in Laos.

philippines

The closest known relatives to SARS-CoV-2 were found

in southwestern China and Laos.

Sources: Sarah Temmam et al., Nature; SimpleMaps

Note: Cities shown have a population of at least 200,000.

There are hundreds of large cities in China and Southeast Asia.

There are hundreds of large cities in China

and Southeast Asia.

The pandemic started roughly 1,000 miles away, in Wuhan, home to the world’s foremost SARS-like virus research lab.

The pandemic started roughly 1,000 miles away,

in Wuhan, home to the world’s foremost SARS-like virus research lab.

The pandemic started roughly 1,000 miles away, in Wuhan,

home to the world’s foremost SARS-like virus research lab.

• Even at hot spots where these viruses exist naturally near the cave bats of southwestern China and Southeast Asia, the scientists argued, as recently as 2019 , that bat coronavirus spillover into humans is rare .
• When the Covid-19 outbreak was detected, Dr. Shi initially wondered if the novel coronavirus had come from her laboratory , saying she had never expected such an outbreak to occur in Wuhan.
• The SARS‑CoV‑2 virus is exceptionally contagious and can jump from species to species like wildfire . Yet it left no known trace of infection at its source or anywhere along what would have been a thousand-mile journey before emerging in Wuhan.

2 The year before the outbreak, the Wuhan institute, working with U.S. partners, had proposed creating viruses with SARS‑CoV‑2’s defining feature.

• Dr. Shi’s group was fascinated by how coronaviruses jump from species to species. To find viruses, they took samples from bats and other animals , as well as from sick people living near animals carrying these viruses or associated with the wildlife trade. Much of this work was conducted in partnership with the EcoHealth Alliance, a U.S.-based scientific organization that, since 2002, has been awarded over $80 million in federal funding to research the risks of emerging infectious diseases.
• The laboratory pursued risky research that resulted in viruses becoming more infectious : Coronaviruses were grown from samples from infected animals and genetically reconstructed and recombined to create new viruses unknown in nature. These new viruses were passed through cells from bats, pigs, primates and humans and were used to infect civets and humanized mice (mice modified with human genes). In essence, this process forced these viruses to adapt to new host species, and the viruses with mutations that allowed them to thrive emerged as victors.
• By 2019, Dr. Shi’s group had published a database describing more than 22,000 collected wildlife samples. But external access was shut off in the fall of 2019, and the database was not shared with American collaborators even after the pandemic started , when such a rich virus collection would have been most useful in tracking the origin of SARS‑CoV‑2. It remains unclear whether the Wuhan institute possessed a precursor of the pandemic virus.
• In 2021, The Intercept published a leaked 2018 grant proposal for a research project named Defuse , which had been written as a collaboration between EcoHealth, the Wuhan institute and Ralph Baric at the University of North Carolina, who had been on the cutting edge of coronavirus research for years. The proposal described plans to create viruses strikingly similar to SARS‑CoV‑2.
• Coronaviruses bear their name because their surface is studded with protein spikes, like a spiky crown, which they use to enter animal cells. T he Defuse project proposed to search for and create SARS-like viruses carrying spikes with a unique feature: a furin cleavage site — the same feature that enhances SARS‑CoV‑2’s infectiousness in humans, making it capable of causing a pandemic. Defuse was never funded by the United States . However, in his testimony on Monday, Dr. Fauci explained that the Wuhan institute would not need to rely on U.S. funding to pursue research independently.

The Wuhan lab ran risky experiments to learn about how SARS-like viruses might infect humans.

1. Collect SARS-like viruses from bats and other wild animals, as well as from people exposed to them.

2. Identify high-risk viruses by screening for spike proteins that facilitate infection of human cells.

2. Identify high-risk viruses by screening for spike proteins that facilitate infection of

human cells.

In Defuse, the scientists proposed to add a furin cleavage site to the spike protein.

3. Create new coronaviruses by inserting spike proteins or other features that could make the viruses more infectious in humans.

4. Infect human cells, civets and humanized mice with the new coronaviruses, to determine how dangerous they might be.

• While it’s possible that the furin cleavage site could have evolved naturally (as seen in some distantly related coronaviruses), out of the hundreds of SARS-like viruses cataloged by scientists, SARS‑CoV‑2 is the only one known to possess a furin cleavage site in its spike. And the genetic data suggest that the virus had only recently gained the furin cleavage site before it started the pandemic.
• Ultimately, a never-before-seen SARS-like virus with a newly introduced furin cleavage site, matching the description in the Wuhan institute’s Defuse proposal, caused an outbreak in Wuhan less than two years after the proposal was drafted.
• When the Wuhan scientists published their seminal paper about Covid-19 as the pandemic roared to life in 2020, they did not mention the virus’s furin cleavage site — a feature they should have been on the lookout for, according to their own grant proposal, and a feature quickly recognized by other scientists.
• Worse still, as the pandemic raged, their American collaborators failed to publicly reveal the existence of the Defuse proposal. The president of EcoHealth, Peter Daszak, recently admitted to Congress that he doesn’t know about virus samples collected by the Wuhan institute after 2015 and never asked the lab’s scientists if they had started the work described in Defuse. In May, citing failures in EcoHealth’s monitoring of risky experiments conducted at the Wuhan lab, the Biden administration suspended all federal funding for the organization and Dr. Daszak, and initiated proceedings to bar them from receiving future grants. In his testimony on Monday, Dr. Fauci said that he supported the decision to suspend and bar EcoHealth.
• Separately, Dr. Baric described the competitive dynamic between his research group and the institute when he told Congress that the Wuhan scientists would probably not have shared their most interesting newly discovered viruses with him . Documents and email correspondence between the institute and Dr. Baric are still being withheld from the public while their release is fiercely contested in litigation.
• In the end, American partners very likely knew of only a fraction of the research done in Wuhan. According to U.S. intelligence sources, some of the institute’s virus research was classified or conducted with or on behalf of the Chinese military . In the congressional hearing on Monday, Dr. Fauci repeatedly acknowledged the lack of visibility into experiments conducted at the Wuhan institute, saying, “None of us can know everything that’s going on in China, or in Wuhan, or what have you. And that’s the reason why — I say today, and I’ve said at the T.I.,” referring to his transcribed interview with the subcommittee, “I keep an open mind as to what the origin is.”

3 The Wuhan lab pursued this type of work under low biosafety conditions that could not have contained an airborne virus as infectious as SARS‑CoV‑2.

• Labs working with live viruses generally operate at one of four biosafety levels (known in ascending order of stringency as BSL-1, 2, 3 and 4) that describe the work practices that are considered sufficiently safe depending on the characteristics of each pathogen. The Wuhan institute’s scientists worked with SARS-like viruses under inappropriately low biosafety conditions .

In the United States, virologists generally use stricter Biosafety Level 3 protocols when working with SARS-like viruses.

Biosafety cabinets prevent

viral particles from escaping.

Viral particles

Personal respirators provide

a second layer of defense against breathing in the virus.

DIRECT CONTACT

Gloves prevent skin contact.

Disposable wraparound

gowns cover much of the rest of the body.

Personal respirators provide a second layer of defense against breathing in the virus.

Disposable wraparound gowns

cover much of the rest of the body.

Note: ​​Biosafety levels are not internationally standardized, and some countries use more permissive protocols than others.

The Wuhan lab had been regularly working with SARS-like viruses under Biosafety Level 2 conditions, which could not prevent a highly infectious virus like SARS-CoV-2 from escaping.

Some work is done in the open air, and masks are not required.

Less protective equipment provides more opportunities

for contamination.

Some work is done in the open air,

and masks are not required.

Less protective equipment provides more opportunities for contamination.

• In one experiment, Dr. Shi’s group genetically engineered an unexpectedly deadly SARS-like virus (not closely related to SARS‑CoV‑2) that exhibited a 10,000-fold increase in the quantity of virus in the lungs and brains of humanized mice . Wuhan institute scientists handled these live viruses at low biosafet y levels , including BSL-2.
• Even the much more stringent containment at BSL-3 cannot fully prevent SARS‑CoV‑2 from escaping . Two years into the pandemic, the virus infected a scientist in a BSL-3 laboratory in Taiwan, which was, at the time, a zero-Covid country. The scientist had been vaccinated and was tested only after losing the sense of smell. By then, more than 100 close contacts had been exposed. Human error is a source of exposure even at the highest biosafety levels , and the risks are much greater for scientists working with infectious pathogens at low biosafety.
• An early draft of the Defuse proposal stated that the Wuhan lab would do their virus work at BSL-2 to make it “highly cost-effective.” Dr. Baric added a note to the draft highlighting the importance of using BSL-3 to contain SARS-like viruses that could infect human cells, writing that “U.S. researchers will likely freak out.” Years later, after SARS‑CoV‑2 had killed millions, Dr. Baric wrote to Dr. Daszak : “I have no doubt that they followed state determined rules and did the work under BSL-2. Yes China has the right to set their own policy. You believe this was appropriate containment if you want but don’t expect me to believe it. Moreover, don’t insult my intelligence by trying to feed me this load of BS.”
• SARS‑CoV‑2 is a stealthy virus that transmits effectively through the air, causes a range of symptoms similar to those of other common respiratory diseases and can be spread by infected people before symptoms even appear. If the virus had escaped from a BSL-2 laboratory in 2019, the leak most likely would have gone undetected until too late.
• One alarming detail — leaked to The Wall Street Journal and confirmed by current and former U.S. government officials — is that scientists on Dr. Shi’s team fell ill with Covid-like symptoms in the fall of 2019 . One of the scientists had been named in the Defuse proposal as the person in charge of virus discovery work. The scientists denied having been sick .

4 The hypothesis that Covid-19 came from an animal at the Huanan Seafood Market in Wuhan is not supported by strong evidence.

• In December 2019, Chinese investigators assumed the outbreak had started at a centrally located market frequented by thousands of visitors daily. This bias in their search for early cases meant that cases unlinked to or located far away from the market would very likely have been missed. To make things worse, the Chinese authorities blocked the reporting of early cases not linked to the market and, claiming biosafety precautions, ordered the destruction of patient samples on January 3, 2020, making it nearly impossible to see the complete picture of the earliest Covid-19 cases. Information about dozens of early cases from November and December 2019 remains inaccessible.
• A pair of papers published in Science in 2022 made the best case for SARS‑CoV‑2 having emerged naturally from human-animal contact at the Wuhan market by focusing on a map of the early cases and asserting that the virus had jumped from animals into humans twice at the market in 2019. More recently, the two papers have been countered by other virologists and scientists who convincingly demonstrate that the available market evidence does not distinguish between a human superspreader event and a natural spillover at the market.
• Furthermore, the existing genetic and early case data show that all known Covid-19 cases probably stem from a single introduction of SARS‑CoV‑2 into people, and the outbreak at the Wuhan market probably happened after the virus had already been circulating in humans.

An analysis of SARS-CoV-2’s evolutionary tree shows how the virus evolved as it started to spread through humans.

SARS-COV-2 Viruses closest

to bat coronaviruses

more mutations

Source: Lv et al., Virus Evolution (2024) , as reproduced by Jesse Bloom

The viruses that infected people linked to the market were most likely not the earliest form of the virus that started the pandemic.

• Not a single infected animal has ever been confirmed at the market or in its supply chain. Without good evidence that the pandemic started at the Huanan Seafood Market, the fact that the virus emerged in Wuhan points squarely at its unique SARS-like virus laboratory.

5 Key evidence that would be expected if the virus had emerged from the wildlife trade is still missing.

In previous outbreaks of coronaviruses, scientists were able to demonstrate natural origin by collecting multiple pieces of evidence linking infected humans to infected animals.

Infected animals

Earliest known

cases exposed to

live animals

Antibody evidence

of animals and

animal traders having

been infected

Ancestral variants

of the virus found in

Documented trade

of host animals

between the area

where bats carry

closely related viruses

and the outbreak site

Infected animals found

Earliest known cases exposed to live animals

Antibody evidence of animals and animal

traders having been infected

Ancestral variants of the virus found in animals

Documented trade of host animals

between the area where bats carry closely

related viruses and the outbreak site

For SARS-CoV-2, these same key pieces of evidence are still missing , more than four years after the virus emerged.

For SARS-CoV-2, these same key pieces of evidence are still missing ,

more than four years after the virus emerged.

• Despite the intense search trained on the animal trade and people linked to the market, investigators have not reported finding any animals infected with SARS‑CoV‑2 that had not been infected by humans. Yet, infected animal sources and other connective pieces of evidence were found for the earlier SARS and MERS outbreaks as quickly as within a few days, despite the less advanced viral forensic technologies of two decades ago.
• Even though Wuhan is the home base of virus hunters with world-leading expertise in tracking novel SARS-like viruses, investigators have either failed to collect or report key evidence that would be expected if Covid-19 emerged from the wildlife trade . For example, investigators have not determined that the earliest known cases had exposure to intermediate host animals before falling ill. No antibody evidence shows that animal traders in Wuhan are regularly exposed to SARS-like viruses, as would be expected in such situations.
• With today’s technology, scientists can detect how respiratory viruses — including SARS, MERS and the flu — circulate in animals while making repeated attempts to jump across species . Thankfully, these variants usually fail to transmit well after crossing over to a new species and tend to die off after a small number of infections. In contrast, virologists and other scientists agree that SARS‑CoV‑2 required little to no adaptation to spread rapidly in humans and other animals . The virus appears to have succeeded in causing a pandemic upon its only detected jump into humans.

The pandemic could have been caused by any of hundreds of virus species, at any of tens of thousands of wildlife markets, in any of thousands of cities, and in any year. But it was a SARS-like coronavirus with a unique furin cleavage site that emerged in Wuhan, less than two years after scientists, sometimes working under inadequate biosafety conditions, proposed collecting and creating viruses of that same design.

While several natural spillover scenarios remain plausible, and we still don’t know enough about the full extent of virus research conducted at the Wuhan institute by Dr. Shi’s team and other researchers, a laboratory accident is the most parsimonious explanation of how the pandemic began.

Given what we now know, investigators should follow their strongest leads and subpoena all exchanges between the Wuhan scientists and their international partners, including unpublished research proposals, manuscripts, data and commercial orders. In particular, exchanges from 2018 and 2019 — the critical two years before the emergence of Covid-19 — are very likely to be illuminating (and require no cooperation from the Chinese government to acquire), yet they remain beyond the public’s view more than four years after the pandemic began.

Whether the pandemic started on a lab bench or in a market stall, it is undeniable that U.S. federal funding helped to build an unprecedented collection of SARS-like viruses at the Wuhan institute, as well as contributing to research that enhanced them . Advocates and funders of the institute’s research, including Dr. Fauci, should cooperate with the investigation to help identify and close the loopholes that allowed such dangerous work to occur. The world must not continue to bear the intolerable risks of research with the potential to cause pandemics .

A successful investigation of the pandemic’s root cause would have the power to break a decades-long scientific impasse on pathogen research safety, determining how governments will spend billions of dollars to prevent future pandemics. A credible investigation would also deter future acts of negligence and deceit by demonstrating that it is indeed possible to be held accountable for causing a viral pandemic. Last but not least, people of all nations need to see their leaders — and especially, their scientists — heading the charge to find out what caused this world-shaking event. Restoring public trust in science and government leadership requires it.

A thorough investigation by the U.S. government could unearth more evidence while spurring whistleblowers to find their courage and seek their moment of opportunity. It would also show the world that U.S. leaders and scientists are not afraid of what the truth behind the pandemic may be.

More on how the pandemic may have started

Where Did the Coronavirus Come From? What We Already Know Is Troubling.

Even if the coronavirus did not emerge from a lab, the groundwork for a potential disaster had been laid for years, and learning its lessons is essential to preventing others.

By Zeynep Tufekci

Why Does Bad Science on Covid’s Origin Get Hyped?

If the raccoon dog was a smoking gun, it fired blanks.

By David Wallace-Wells

A Plea for Making Virus Research Safer

A way forward for lab safety.

By Jesse Bloom

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Alina Chan ( @ayjchan ) is a molecular biologist at the Broad Institute of M.I.T. and Harvard, and a co-author of “ Viral : The Search for the Origin of Covid-19.” She was a member of the Pathogens Project , which the Bulletin of the Atomic Scientists organized to generate new thinking on responsible, high-risk pathogen research.

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