Free Trade vs. Protectionism

Release Date
August 31, 2011

Topic

Free Markets and Capitalism
Description

According to Prof. Don Boudreaux, free trade is nothing more than a system of trade that treats foreign goods and services no differently than domestic goods and services. Protectionism, on the other hand, is a system of trade that discriminates against foreign goods and services in an attempt to favor domestic goods and services. In theory, free trade outperforms protectionism by bringing lower cost goods and services to consumers. In practice, the benefits of free trade can be seen in countries like America and Hong Kong. Both countries have a relatively high degree of free trade, and, as a consequence, have experienced an explosion of wealth.

  • Desert Island Game (game, beginner): Can you learn something about trade and cooperation by being marooned on a desert island?
  • Trade Ruler (game, advanced): As the Supreme Ruler of an island, you want the country to prosper. By engaging in international trade, you can achieve this goal.
  • Free Trade [Article]: Alan Blinder summarizes the meaning of free trade in this short essay.
  • Protectionism [Article]: Jagdish Bhagwati, the dean of trade economists, explains the consequences of protectionism.
  • Comparative Advantage [Article]: Donald J. Boudreaux provides an introduction to the principle of comparative advantage, which is at the heart of the economic case for free trade.
  • Economic Sophisms [Book]: Frederic Bastiat’s short, witty, and incisive essays expose the follies of protectionism.
    • Pay close attention A Petition, chapter seven of Economic Sophisms
  • Free Trade Under Fire, 3rd edition [Book]: Douglas A. Irwin, one of today’s leading trade economists, reviews the facts and arguments relevant to the question: Should nations trade freely?
  • The Choice, 3rd edition [Book]: Russell Roberts provides a brief, brilliant, eloquent, and moving ghost story on the consequences of free trade and protectionism.
Opposing Viewpoints
  • Globalization and Its Discontents [Book]: Joseph E. Stiglitz, a Nobel-laureate economist, shares his reasons for why he is more skeptical of free trade than are most economists.

Free Trade vs. Protectionism
Free trade is simply a policy of treating foreign goods and services no differently than domestic goods and services are treated. Free trade is a policy of allowing domestic consumers to buy from abroad just as freely as they can buy at home. Protectionism is a policy of discriminating against foreign goods and services, a policy of saying to domestic consumers, “If you want to buy foreign-made goods and services, you have to jump through some extra large hurdles to buy those goods and services.”
By far, the chief tool of protectionism is a tariff, and a tariff is a tax on imports. It’s a special levy that consumers in the home economy are forced to pay if they want to buy goods made abroad. In practice, the tariffs are imposed on the importers of the good, and so that higher tax is reflected in a higher price of the good. So, when consumers buy the good, they don’t necessarily see the tariff, they just see the price that reflects the tariff that the importer of the good is forced by the government to pay for the privilege of importing that good.
Free trade is not just a theory; it’s been practiced. The greatest example is Hong Kong. Hong Kong has virtually no natural resources; I think feldspar is the chief natural resource of Hong Kong. And Hong Kong is one of the world’s most wealthy places. And the reason Hong Kong is wealthy is because for years Hong Kong has had a policy of pretty much unilateral free trade. It has a deep water port, and it allows its citizens to buy, on whatever terms its citizens want to buy, goods and services from wherever else in the world they want to buy those goods and services. As a result, Hong Kong is very, very rich.
The United States is another example of success of free trade. One of the intended consequences of the 1787 Constitution was to turn the United States into a free-trade zone. The Founders didn’t use the term “free-trade zone,” because it wasn’t invented back then, but that’s what they had in mind. So as a consequence, we have this huge transcontinental country, from the Atlantic to the Pacific, from the Gulf Coast up to Canada, Americans are free to buy from any other American that they want in this huge free-trade zone. And so people in Maine buy pineapples from people in Hawaii, people in Hawaii buy maple syrup from people in Maine.
One of the reasons for the United States’ enormous economic growth over the past 2 centuries and high standard of living is that we have total free trade within America. There are no tariffs, there are no trade restrictions. If protectionism was such a dandy thing, then you’d think each state could make its citizens wealthier by putting up trade restrictions around the states’ borders. They don’t do that, fortunately, because the Commerce Clause in the Constitution prohibits such trade restrictions. As a consequence, we have this huge free-trade zone in America and it’s unquestionable that the free trade that takes place within this huge transcontinental nation is a major reason for Americans’ high standard of living and continued economic growth.