Evaluating the Controversy between Free Trade and Protectionism
This chapter argues for economic free trade through the lens of trade theory. While free trade may not be optimal, many consider it to be the most pragmatic policy option for a country. During the 19th and 20th centuries, policymakers asked whether free trade was in everyone's best interest. The modern case for free trade argues that government intervention in trade is impractical. Free trade is not always the best policy choice when the objective is to maximize national welfare. Free trade is pragmatically, rather than technically, optimal because it is attainable and most likely to produce the highest level of economic efficiency.
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".
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.
Exercise
- 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.
- The statement suggested by Paul Krugman as being an element of the economist's creed - if ever there were such a thing.