International Trade and Economics of Less: Protectionism Versus Free Trade

Protectionism Versus Free Trade As noted earlier, declines in a nation's comparative advantage caused by declines in productivity growth inevitably disrupt particular industries. Workers with specialized skills lose their jobs, and owners of the other specialized inputs also suffer reductions in income. These workers and input owners naturally prefer to be protected from foreign competition because their incomes will be higher under such circum-stances. Arguments in Favor of Protecting Domestic Industries from Foreign Competition The arguments in favor of free trade have already been covered in the analysis of comparative advantage. Free trade expands consumption possibilities in a nation beyond production possibilities. It allows higher standards of living by increasing real incomes from available resources. This implies lower prices for goods and services as well. In this section we look at the arguments against free trade and in favor of protecting domestic industries. 1. National security. Many people believe that self-sufficiency is necessary for reasons of national security. According to this argument, relatively inefficient domestic industries producing strategically important materials and commodities should not be allowed to go out of business because of foreign competition. A good domestic mix of industries, particularly for food, fiber, steel, and petroleum products, ensures that the United States will not be overly dependent on foreign sources of supply. Thus, in the event of an international crisis, the United States will be assured of stable supplies of these basic goods. The inevitable cost of such protectionism is higher prices for American consumers. 2. Reducing structural unemployment. There are transaction costs associated with adjustment to a new industrial mix. For example, you may support protection of the U.S. automobile industry because you think that, in the long run, the United States will be able to produce cars more cheaply than Japan. When the industry is protected in the short run, structural unemployment is reduced. In the long run consumers don't pay higher prices for cars when the fruits of a new investment program result in higher productivity gains and lower prices. Protecting infant industries. Protection of a newly established or "infant" industry from foreign competition allows the new industry to expand to the point at which it can enjoy economies of scale. In this case consumers pay high prices as a result of protection in the short run but hope to enjoy lower prices in the future as the infant industry achieves gains in productivity in the long run. The problem with this argument is that it's difficult to identify an infant industry that will realize such gains. In addition, protected "infant" industries often fail to mature to the point where they can be competitive, precisely because of the inimical effects of the absence of competition. 4. Protecting U.S. industries against subsidized foreign producers. Some governments subsidize exporting firms to allow them to sell their goods at lower prices in foreign markets. These lower prices are not the result of more efficient production in the exporting country. Because some such subsidies cause American industries to go out of business, they give the foreign suppliers more control over market price in the long run. At that time the foreign government reduces the subsidy, and prices of the imported goods rise. Supporters of U.S. protection against such policies argue that there are gains from not letting the subsidized goods temporarily disrupt U.S. industries. The chief gain is the reduction in transaction costs associated with setting up and ceasing operations as foreign subsidies come and go. Another gain is a reduction in the risk that foreign suppliers will acquire monopoly power in the future. The gains from protecting U.S. industries must always be weighed against the costs to American consumers in terms of higher prices and reduced real incomes. Remember that the gains from international trade are increased consumption possibilities. These gains are mutually enjoyed by all trading partners. The purpose of international trade is not to maximize the difference between exports and imports! Even nations with huge balance of trade deficits, as has been the case for the United States during the 1980s, gain from international trade because such trade expands consumption possibilities. These gains of goods and services increase the standard of living of Americans in the aggregate. Most of the arguments against trade stem from the redistribution of income that results when some firms fail as a result of foreign competition.