FREE TRADE VERSUS PROTECTIONISM
President Trump
Speaking in Ypsilanti, Michigan: March,
2017
Unit
Overview
In
the previous unit, you looked at some simple examples of the economic
principles underlying the international exchange of goods and services. Trade, however, does not occur in a vacuum,
and a number of factors impact how it is conducted. One of the most significant
is government regulation. Many Americans
argue that quotas, tariffs and subsidies are necessary to save jobs and to
protect growing industries. Others
insist that these actions only harm consumers and put off inevitable changes in
employment patterns. Should producers
benefit at the expense of consumers? Do
we need more or fewer laws governing trade?
Is free trade the most beneficial course of action? Let's
see how it all works.
Free
Trade and Protectionism
Free trade is a system that
permits nations to exchange goods and services without government
interference. This eliminates
regulations, taxes and licenses. Since
each country has a comparative advantage when it produces certain items, free
trade, at least in theory, is the most efficient way to use scarce
resources. For this reason, it wins the
approval of most economists. For
consumers, it offers more choices, better quality and lower prices. Jobs and incomes naturally increase in export
industries, and the overall standard of living rises. Free trade also inspires countries to work
together and encourages foreign investment.
So what's not to love about free trade?
It
is often assumed that free trade benefits everyone, but this is not true. Although its overall impact is often
positive, not all regions within a country profit equally. Therefore, for some people, there is plenty
not to love about free trade. These
individuals propose that the government establish trade barriers, such as tariffs, quotas and subsidies, to give the
home country an advantage over foreign imports.
This policy is called protectionism. Since some trading partners ignore human
rights, pay very low wages and have weak environmental standards,
protectionists advocate trade barriers to keep domestic industries
competitive. This is sometimes referred
to as leveling the playing field. Protectionists
contend that it helps to keep jobs and incomes in local communities. In addition, critics of free trade warn that
it is dangerous to become too dependent on imported goods. Because some products may be essential to
national defense, governments may choose to impose trade barriers. By taking this action, they ensure that
certain industries continue to operate.
Protectionism also shelters new,
or infant, industries as they
grow and strengthen. At the same time, proponents
insist that protectionist policies conserve energy and decrease environmental
damage. Goods produced and sold within
national borders result in less packaging and lower fuel consumption. Because both sides continue to present valid
arguments, it appears that the controversy surrounding free trade will not be
resolved anytime soon.
Go to Questions 1
through 7.
Trade
Barriers
Today,
most nations have some barriers that limit free trade. A trade barrier is defined as any restriction
that prevents foreign goods and services from freely crossing a country's
borders. Common trade barriers include
quotas, voluntary export restraints (VERs), tariffs and subsidies. As with all choices, these options come with
opportunity costs.
Ø Quotas: A
quota is a law that sets a specific limit on the amount of a good that can be
imported. It reduces the total supply of
a particular product and keeps prices high for domestic producers. For example, the United States restricts the
amount of sugar than can legally enter the country by setting a quota of 5.8
billion pounds per year. Once shipments
from foreign countries reach this total, the importation of sugar ceases. As a result, the price of a pound of sugar
within the U.S. averages $.43, but the average price per pound on the world
market is $.27. American producers
benefit at the expense of consumers, who pay higher prices. On the other hand, if sugar imports remain
unlimited, most U.S. producers would be out of business, and an estimated 3,000
jobs would be lost.
Sugarcane
Fields in Brazil, the World's Largest Sugar Producer: Image Courtesy of Mario Roberto Duran Ortiz
Ø Voluntary export restraints: Unlike a quota, a voluntary export restraint
(VER), is not a law. It is a
self-imposed limit on the number of products that one nation can ship to
another. In 1981, lower-priced Japanese
vehicles competed intensely for American customers. This threatened the stability of the U.S.
auto industry. The Reagan administration
asked Japan to lower the amount of its auto exports to the United States
voluntarily. The Japanese government
agreed because U.S. negotiators threatened to set up harsher trade barriers if
Japan refused. Although this deal
benefitted American manufacturers, it came with trade-offs. This voluntary export restraint reduced the
choices available to consumers and increased the prices of all vehicles sold in
the United States.
Ø Tariffs: Before
the collection of personal income tax, taxes on imported goods, or tariffs,
were the American government's primary source of revenue. Today, most tariffs are levied to protect
U.S. farmers and manufacturers from foreign competition. Here is an example of how it works. Let's say that it costs $1 to produce a
stress ball in the United States.
However, an American retailer can import the same stress ball for
$.35. By placing a tariff of $.95 on
this item, the cost of the foreign stress ball increases to $1.30. The American-made stress ball is now cheaper
than the foreign import. While this
protects those who produce stress balls in the United States, it forces
consumers to pay more for the same item.
Ø Subsidies:
National leaders recognize that certain businesses are necessary for the
well-being of their citizens and for economic stability. When these industries struggle to survive due
to competition from foreign imports, governments sometimes provide cash
payments or tax reductions to help.
These supports are called subsidies.
The U.S. government provides this assistance to a variety of businesses,
groups and individuals, including American farmers. When used for this purpose,
economists consider subsidies barriers to trade because they permit farmers to
sell at low, competitive prices while maintaining their income. Proponents of this policy argue that it keeps
family farms in business and decreases dependency on overseas markets for
food. However, all income earners pay
for these subsidies in the form of higher taxes.
U.S. Farm Subsidies: Graph Courtesy of Arichnad
Ø Other barriers:
Safety regulations, health standards and licenses sometimes represent
less formal barriers to trade. If a
business must obtain a license to sell goods in a certain country, high fees
and slow processing can delay and eventually prohibit sales. Countries may also apply health and safety
regulations that are very demanding and, in turn, discourage imports. By establishing rules that are too difficult
for most sellers to follow, a nation can sharply reduce and even eliminate
competition within its borders.
Go to Questions 8
through 14.
Trade
Wars
Although
trade barriers can benefit the country that initiates them, they can cause
long-term, negative outcomes. When one
country limits imports, its trading partners may respond by setting their own
restrictions. This creates an escalating
cycle of trade barriers, known as a trade
war, and it can have serious economic consequences for all the nations
involved. Just as increased trade
benefits all trading partners, a decrease in trade harms all trading partners.
The
United States learned just how devastating a trade war can be in 1930. To combat the effects of the Great
Depression, Congress passed the Smoot-Hawley
Tariff. This act raised the tariff
on all imports to 50%. Congress reasoned
that this law would protect American workers from foreign competition and would
provide income to buy American products priced lower than their foreign
counterparts. Other countries, however,
quickly responded and raised tariffs on American-manufactured goods. This resulted in a trade war that closed
foreign markets to U.S. products and reduced the demand for goods
worldwide. International trade declined
dramatically, and economic conditions worsened around the globe.
U.S. Representatives Willis Hawley and
Reed Smoot: 1930
Although
trade wars still occur, they typically evolve around a few specific products
rather than everything that a country imports.
When these controversies do arise, international organizations, such as
the World Trade Organization (WTO) founded in 1995, try to resolve them before
they become destructive. In 2002, the
American steel industry was experiencing difficult times. Plant closings, downsizing and over thirty
declarations of bankruptcy jeopardized local economies and resulted in demands
for government intervention. Steel
manufacturers laid the blame squarely on foreign imports and requested tariffs
on steel from overseas.
Although
some nations were exempt due to trade agreements, the federal government
established tariffs ranging from 8 to 30% on imported steel. Since steel tariffs had traditionally ranged
anywhere from 0 to 1%, these rates seemed extraordinarily high, but steel
producers pointed out these taxes were similar to those placed on shoes and
clothing. The European Union threatened
to retaliate by placing tariffs on American products. With the threat of a trade war looming, the
World Trade Organization investigated the case and ruled against the U.S.
tariff on steel. When President George W.
Bush announced plans to keep the tariff in place in spite of the WTO's
response, the European Union declared it would attach tariffs to oranges from
Florida and autos from Michigan. This was enough to convince the Bush
Administration to disband the tariff in 2003 rather than end it as scheduled in
2005.
Jay
Rockefeller, West Virginia Senator from 1985 to 2015, Speaking at a Steel
Rally: 2002
The
controversy over steel imports and their effect on the U.S. steel industry
heated up again in 2016. American
manufacturers and the Commerce Department accused China and several other
countries of dumping, a practice
that is a form of predatory pricing. It
occurs when one country tries to increase its share of a particular market by
selling goods for less money than it took to produce them. In terms of international trade, this is done
with the intent of driving other nations out of the market. The video listed below explains why dumping
is considered a negative aspect of free trade.
Go to Questions 15 through 20.
What's
next?
In
recent decades, the world has experienced a large increase in the volume of
international trade. The number of
preferential trade agreements, which reduce trade barriers among member
nations, has also grown. At the same
time, multinational trade organizations, such as the World Trade Organization
and the World Bank, have expanded their membership and their roles in ensuring
that trade flows smoothly and fairly across the globe. Before learning about these topics in the
next unit, review the names and terms found in Unit 16; then, answer Questions 21
through 30.
Go to Questions 21
through 30.
 |
| Unit 16 Main Points Worksheet |
| Unit 16 Barriers to Trade Worksheet |
| Unit 16 What is a tariff? An economist explains Article and Quiz |