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11: Evaluating the Controversy between Free Trade and Protectionism
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- 11.1: Introduction
- 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.
- 11.2: Economic Efficiency Effects of Free Trade
- 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.
- 11.3: Free Trade and the Distribution of Income
- Although most trade models suggest that aggregate economic efficiency is raised with free trade, these same models do not indicate that every individual in the economy will share in the benefits. Indeed, most trade models demonstrate that movements to free trade will cause a redistribution of income between individuals within the economy. In other words, some individuals will gain from free trade while others will lose.
- 11.4: The Case for Selected Protection
- An argument for selected protection arises in the presence of imperfectly competitive markets, market distortions, or both. In these cases, it is often possible to show that an appropriately targeted trade policy (selected protection) can raise aggregate economic efficiency. In other words, free trade need not always be the best policy choice when the objective is to maximize national welfare.
- 11.5: The Economic Case against Selected Protection
- The economic case against selected protectionism does not argue that the reasons for protection are conceptually or theoretically invalid. Indeed, there is general acceptance among economists that free trade is probably not the best policy in terms of maximizing economic efficiency in the real world.
- 11.6: Free Trade as the "Pragmatically Optimal" Policy Choice
- 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.