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.
Free Trade as the "Pragmatically Optimal" Policy Choice
Learning Objective
- 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.
Key Takeaway
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.
Exercise
- 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.