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.
Economic Efficiency Effects of Free Trade
Learning Objective
- 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.
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 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.
- The term often used as a synonym for an improvement in economic efficiency.