What's Wrong with Protectionism?

Free trade simply means unimpeded exchanges between individuals over political borders. It is the international (or interregional) equivalent of domestic free markets. In free trade, any individual or private entity can make deals, as opposed to the government’s making one deal for everybody (which will be good for some and bad for others). Between free trade and trade prohibition, many degrees of managed trade exist. Managed trade includes all sorts of restrictions imposed by political authorities, such as tariffs (also called duties), antidumping rules, and nontariff barriers such as quotas (“voluntary” or overtly compulsory). So-called free-trade agreements—such as the North American Free Trade Agreement (NAFTA), the rules of the World Trade Organization (WTO), or the proposed Trans-Pacific Partnership (TPP)—are part free trade, part managed trade.

Objections to Free Trade

Among Americans, fears related to free trade include the following:

1. Americans cannot compete against low-cost foreign producers, such as workers who are paid a fraction of the wages that are prevalent in the United States. (Producers in economics include both businesses and their employees.)
2. Free trade harms the United States.
3. Free trade brings detrimental trade deficits.
4. The United States is losing its factories.
5. Free trade destroys jobs.
6. Free trade pushes wages down in rich countries.
7. Free trade is not fair.

Those fears must be taken seriously. Many of them date from the rise of mercantilist thinking in 16th century Europe. Promoted by businessmen and state rulers, mercantilism was similar to today’s protectionism.

The majority of modern economists favor free trade, which is the topic on which they are most in agreement. Even economists who are usually thought to be on the left generally oppose protectionism. For example, Paul Krugman, the well-known winner of the 2008 Nobel Prize in economics and New York Times columnist, is also the coauthor of a leading textbook on international trade that broadly defends free trade. Krugman and his coauthors summarize the case for free trade (“the standard view of most international economists”) as follows:

• The costs of deviating from free trade are large.
• The political process will subvert attempts to deviate from free trade.

Yet the objections to free trade must be considered, and this book aims to do so. First it will discuss the first six of the aforementioned objections, taking each in turn. Next it will examine the politics of trade and the relationship between international trade and domestic trade. Then it will address the fairness objection, and a conclusion will pull all these threads together. This book deals mainly with the theory of free trade, but it provides a few examples. The reader will find many other examples in the media and in political debates.