Free trade

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Classical political economist David Ricardo is regarded as the father of the principle of comparative advantage, the underpinning principle of free trade.
It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.
Adam Smith[1]
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Free trade is an economic practice in which two or more countries agree to enforce few or no barriers to trade (such as quotas or tariffs) upon the exchange of goods and services between said countries. The concept is central to classical liberalism, especially international classical liberalism, whose proponents believe that free trade naturally leads to free cultural exchange and the free exchange of ideas for the populations involved. For many modern international-relations-minded classical liberals, free trade also promotes peace because it intensifies interdependence in addition to cultural exchange.[2] For this reason and others, free trade forms a significant portion of the backbone of the European Union and of European cooperation institutions more broadly.

Free trade yields clear benefits as it allows people to produce what they produce best and to consume the great variety of goods and services produced around the world. However, opposition to free trade can come from many different political stances:

  • Economic nationalists and mercantilists dislike free trade because they see it as threatening to national sovereignty.
  • International-relations realists and neo-mercantilists dislike it because they see it as an obstacle to national security.
  • Some reactionaries dislike it because they fear the possibility of cultural exchange and/or increased immigration.
  • Some conservatives dislike it if it increases their country's net capital outflow.
  • Some progressives dislike it because they see it as harmful to the domestic economy and/or the environment.
  • Some leftists dislike it because they see it as advantageous, both in terms of economics and power,[3] to the elites and disadvantageous to everyone else; they prefer working/middle class internationalism to capitalist internationalism.

And, of course, each of these groups may share the concerns presented by the other groups.

International vs. domestic trade[edit]

Even though international trade is not as visible as domestic trade, they are both everywhere. As economist Greg Mankiw put:[4]:45

Consider your typical day. You wake up in the morning and pour yourself juice from oranges grown in Florida and coffee from beans grown in Brazil. Over breakfast, you read a newspaper written in New York on a tablet made in China. You get dressed in clothes made of cotton grown in Georgia and sewn in factories in Thailand. You drive to class in a car made of parts manufactured in more than a dozen countries around the world. Then you open up your economics textbook written by an author living in Massachusetts, published by a company located in Ohio, and printed on paper made from trees grown in Oregon

In a deep economic sense, trade is trade, and there is nothing special about international trade. Whether it involves people within the same nation or people in different countries is irrelevant. When two people trade, both are made better off. International trade is trade.[5]:167[6]:340 There are, however, in practice, some differences. Nobel Memorial Prize laureates Paul Samuelson and William Nordhaus list three important differences between domestic and international trade:[6]:340

Yumi Hogan, the Korean-American first lady of Maryland, tours an Asian supermarket in Ellicott City, 2018.
  • Expanded trading opportunities: this is the major advantage of international trade: its scope. If people were forced to consume only what they produced at home or in their countries, the world would be poorer not only on the material plane, but also on the spiritual plane. As they put, Canadians could drink no wine, Americans could eat no bananas, and most of the world would be without Hollywood movies.
  • Sovereign nations: Politics play a much bigger role in international trade (although it doesn't mean it should). As the name suggests, international trade involves people and firms living in different countries. Each one of them is a sovereign political entity that regulates the flow of people, goods, and finance crossing its borders. On the other hand, when it comes to domestic trade, there is only one currency, where trade and money flow freely within the borders, and where people usually can migrate easily to seek new opportunities. More than often, nations build some barriers to international trade, using tariffs or quotas, to “protect” workers or firms from foreign competition.
  • International finance. The vast majority of the nations have their own currencies. For example, if you are American and want to buy a Japanese car, you probably want to pay in US dollars, while Toyota wants to be paid in Japanese yen. Luckly for you, dollars can be translated into yen by the foreign exchange rate, which is the relative price of different currencies. The international financial system therefore must ensure a smooth flow and exchange of currencies — or else risk a breakdown in trade.

And why do countries trade? Because, just like people, countries are different, and tend to be good at different things.[6]:341 The heterogenous distribution of natural resources around the world for instance means that no country has enough of everything. One country, for example, may be blessed with a deposit of oil and gas, while another may have a large amount of fertile land. A mountainous country may generate large amounts of hydroelectric power which it sells to its neighbors, while a country with deep-water harbors may become a shipping center. Different countries also have different cultures and tastes. Even when the conditions of production are similar, countries might engage in trade if their tastes for goods and services are different. For example, suppose that country A and country B both produce fish from the sea and meat from the land in about the same amounts but the citizens from the country B have a great fondness for meat while the those from the country A like fish better. A mutually beneficial export of meat from country A and fish from country B would take place.

However, perhaps the most important reason for trade are the differences among countries in production costs. Brazil, for example, has a climate ideally suited to growing sugar cane. Meanwhile, China has an abundance of low-skill workers. Finally, the United States has one of the best educated workforces in the world. Taking advantage of these differences suggests that world production can be maximized when Brazil produces sugar, China assembles iPads, and the United States devotes its efforts to designing the next generation of electronic devices.[5]:16

The principle of comparative advantage[edit]

According to the principle of comparative advantages, international trade can raise living standards in all countries by allowing each country to specialize in producing those goods and services in which it has a comparative advantage.[4]:639 This theory goes beyond the common sense and it is difficult to grasp (and sometimes, to accept), but it's still one of the most fundamental principles in economics, underlying all trade, within a nation and among nations. According to this principle, a country can benefit from trade even if it is more efficient (or less efficient) than other countries in the production of every single good.

According to the father of the principle of comparative advantage, the classical economist David Ricardo, each country will benefit if it specializes in the production and export of those goods that it can produce at relatively low cost. In other words, a country has a comparative advantage in producing a good or a service when the opportunity costWikipedia of producing such good in terms of other goods is lower in that country than elsewhere.[7]:54 Conversely, each country will benefit if it imports those goods which it produces at relatively high cost. To illustrate this fundamental principle, let's consider America and Europe in the 19th century. Let's now suppose that in America, it takes 1 hour of labor to produce a unit of food, while a unit of clothing requires 2 hours of labor. Meanwhile, in Europe the cost is 3 hours of labor for food and 4 hours of labor for clothing. America has, in other words absolute advantage in both goods, as it can produce either one with greater absolute efficiency than can Europe. Does that mean that America will import nothing? And is it economically wise for Europe to “protect” its markets with tariffs or quotas? According to Ricardo, the answer is no to both questions. America has comparative advantage in food, while Europe has comparative advantage in clothing. The reason is that food is relatively inexpensive in America compared to Europe, while clothing is relatively inexpensive in Europe compared to America. From this insight, Ricardo argued that both regions will benefit if they specialize in their areas of comparative advantage—in the American case, the production of food while in the European case is the production of clothing. In this situation, America will export food to pay for European clothing, while Europe will export clothing to pay for American food.[6]:342

Graph illustrating Ricardo's theory.

The principle of comparative advantage can be mathematically illustrated by the following thought experiment: let's suppose that there is no trade and Mexico and the US each devote 12 units of labor to producing computers and 12 units to producing shirts. Since the US economy is much more productive, it has a much broader production possibilities frontierWikipedia and it needs to use 1 unit of labor to produce either 12 shirts or 12 computers. It can, therefore produce 12 shirts, or 12 computers, or 6 of each, as well as any combination. Meanwhile Mexico needs to use 6 units of labor to produce a computer and 2 to produce a shirt. It can produce two computers, or six shirts, or three shirts and one computer. In other words, just like people, countries face trade-offs: In order to produce computers, they must produce less shirts. Here's the catch: The opportunity cost of a shirt in the US is one computer but the opportunity cost of a shirt in Mexico is one-sixth of a computer. As a result, even though the Mexican economy is less productive, Mexico has a lower cost of producing shirts! Since Mexico has the lower opportunity cost of producing shirts, we say that Mexico has a comparative advantage in producing shirts. When it comes to the opportunity costs of producing computers, the American economy can produce one additional computer by giving up one shirt, so the cost of one computer is one shirt. Mexico, however, needs to give up six shirts to build one additional computer. Thus, the US has a comparative advantage in producing computers. According to the principle of comparative advantage, to increase its wealth, a country should produce the goods it can make at low cost and buy the goods that it can make only at high cost. Thus, the theory says the US should make computers and buy shirts. Similarly, the theory says that Mexico should make shirts and buy computers. Back to our example, Mexico and the United States each devote 12 units of labor to producing computers and 12 units to producing shirts. Hence, Mexico will produce one computer and six shirts and the United States will produce 12 computers and 12 shirts if there is no trade. Now let's introduce trade and imagine that Mexico moves 12 units of its labor out of computer production and into shirt production. Thus, Mexico specializes completely by allocating all 24 units of its labor to shirt production, thereby producing 12 shirts. Similarly, suppose that the United States moves 2 units of its labor out of shirt production and into computers—thus producing 14 computers and 10 shirts. With specialization, Mexico produces zero computers and 12 shirts and the United States produces 14 computers and 10 shirts. In other words, the two countries can produce 22 shirts and 14 computers with trade. Without trade, they produce, at most, only 13 computers and 18 shirts.[5] Both sides can benefit because trade allows each of them to specialize in doing what they do best. The US will spend more time producing computers, and less time producing clothes. Mexico will spend more time producing clothes and less time producing computers. As a result of specialization and trade, both countries consume more computers and more clothes without working any more hours.[4]:50

There are two ways to demonstrate de mutual gain from such trade. The first way to show that specialization and trade are beneficial is to think of trade as an indirect method of production. The US could produce more clothes directly, but trade with Mexico allows it to “produce” clothes by producing computers and then trading the computers for clothes. This indirect method of “producing” a clothes is a more efficient method than direct production. There is another way to see the mutual gains from trade: to examine how it affects each country's possibilities for consumption. When trade is absent, consumption possibilities are the same as production possibilities. However, when trade exists, each economy can consume a different mix of products from the mix it produces.[7]:63

And what is the empirical evidence of the Ricardian model? Does it work in practice? According to the economist Paul Krugman, “[t]he answer is a heavily qualified yes” and the basic prediction of the Ricardian model, that countries should export goods in which their productivity is relatively high, has been overwhelming confirmed by a number of studies over the years. Krugman contrasted the US with the UK after the Second World War. British labor productivity was lower than American productivity in almost every sector, so the US had an absolute advantage in almost everything, but the amount of overall British exports was about as large as the amount of American exports at the time. In other words, despite its lower absolute productivity, there were sectors in which Britain had a comparative advantage.[7]:74 A more recent example is Bangladesh, a very poor country that has fairly low productivity even in the production of clothing—but its productivity disadvantage there is much smaller than in other industries. As a result, Bangladesh has a comparative advantage in clothing. When compared with other countries like China, Bangladesh still has an absolute disadvantage in clothing production, with significantly lower productivity. But because its relative productivity in apparel is so much higher than in other industries, Bangladesh has a strong comparative advantage in apparel—and its apparel industry is giving China a run for the money.[7]:75 Historically, the idea of autarky has also failed. Krugman tells us the story of Spain to explain the failure of economic isolation. For many years, under Francisco Franco, Spain was shunned by the post-war international political and economic order, being left out from the Marshall Plan, and, as a result, it is estimated that during the eighteen years of isolation era (1940–1958), the Spanish economy suffered a welfare loss of 8 percent of its total GDP.[7]:64

Does the principle of comparative advantage mean that free trade is perfect? No. While the country as a whole benefits from trade, there are, just like in every policy, trade-offs and of course, some people that are made worse off. A research conducted by the University of Chicago found that, while experts agreed unanimously that while trade with China makes most Americans better as they can buy goods that are made or assembled more cheaply in China, they also agreed that some of those who work in the production of competing goods, such as clothing and furniture, are made worse off.[8] Why? As we saw, the US has a relatively skilled workforce, while China has a relatively unskilled labor force. We then expect that America will export say, aircrafts and import clothing. The price of aircraft in America would rise, and the price of clothing would fall. The most important impact however is the one on labor. As a result of the shift in domestic production, the demand for unskilled labor falls because of the decline in clothing prices and production, while the demand for skilled labor rises because of the rise in aircraft prices and production. This is leads to a decline in the wages of unskilled labor and a rise in the wages of skilled labor in America, which may affect the income distribution in the country. This is the Stolper-Samuelson theorem.[6]:349

Such theorem does not give, however, enough reason to restrict trade according to Samuelson himself:[6]:349

The theory of comparative advantage shows that other sectors will gain more than the injured sectors will lose. Moreover, over long periods of time, those displaced from low-wage sectors eventually gravitate to higher-wage jobs. But those who are temporarily injured by international trade are genuinely harmed and are vocal advocates for protection and trade barriers.

The Heckscher-Ohlin model[edit]

Despite its strong theoretical background and empirical evidence, the Ricardian model of comparative advantages has some limitations too. For instance, it assumes that labor is the only relevant factor of production.[7]:115 The Heckscher-Ohlin model, named after the Swedish economists Bertil OhlinWikipedia (who was jointly awarded the Nobel Memorial Prize in Economic Sciences in 1977 together with the British economist James MeadeWikipedia "for their pathbreaking contribution to the theory of international trade and international capital movements")[9] and Eli HeckscherWikipedia was created to address these limitations by considering the role of resource differences in trade. Such model should, at least in theory, allow us to predict a country's pattern of trade. According to this model, comparative advantages are influenced by the interaction between the countries resources (the relative abundance of factors of production) and the technology of production (that impacts the relative intensity with which different aspects of production are used in the production of different goods and services).[7]:115 Summarizing, countries that are relative capital-intensive, will export capital-intensive goods and services. Meanwhile, countries that are labor-intensive will export labor-intensive goods and services. This is a good thing for free trade and specialization, as the country's abundant factor gains from the opening of trade.[10]:120

To illustrate this theory, let's suppose that there are two imaginary countries, A and B and two goods, cloth and food, as well as two factors of production (labor and capital). A is a labor abundant country, and B, a capital-abundant country, and production of cloth is labor-intensive, while production of food is capital-intensive. We will also assume that the immobile factors that were specific to each sector (capital in cloth, land in food) are mobile in the long run and that the technologies are the same across countries. We therefore expect A to export cloth and B to export food. Right?

In fact, the empirical evidence of the Heckscher-Ohlin model is quite mixed. Prominent economist Wassily Leontief, who won the Nobel Prize in 1973, found out that that US exports were less capital intensive and more labor-intensive than its imports, even though the US is a capital abundant country (the Leontief paradoxWikipedia). Well, maybe the US is an anomaly. Or maybe the fact that Leontief used data from 1947, only two years after the end of the Second World War, affected the results. Actually, another study found that the Heckscher-Ohlin model prediction fails almost 40% of times.[7]:137 What is the problem with such a seemingly robust theory? In our model, we assumed that the technologies are the same across countries. By allowing for technology differences across countries we can resolve the predictive success the test.[7]:138 A good example of the model working in practice is Japan, a relatively technological homogeneous country, where the capital-intensive regions sell capital-intensive goods and services to other parts of the country.[11]

More cases for free trade[edit]

Since free trade receives staunch opposition from people across the entire political spectrum, no country has anything approaching completely free trade. However, since the time of Adam Smith and David Hume, evidence has shown that free trade is an ideal since, despite being a less-than-perfect policy, it is still better than any other policy a government is likely to follow.[7]:275

An IMF study found that trade barriers increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity, as well as more unemployment and higher inequality.[12] That's because restrictions on trade such as tariffs and quota imports tend to cause deadweight losses by distorting the economic incentives of both producers and consumers as well as waste resources. They also raise the domestic prices of imported goods and services, leading to a decline in consumption and imports. On the other hand, free trade eliminates these distortions and increases national welfare. Even though the current levels of trade openness are the highest in history,[13] protectionism costs arounds 1 percent of the global GDP, most of it in poorer countries.[7]:276 There are other more invisible ways that free trade generates efficiency. For instance, it provides to entrepreneurs incentives to seek new ways to export or compete with imports, while it offers more opportunities for learning and innovation when compared with a system of “managed” trade, where the government largely dictates the pattern of imports and exports. In other words, free trade shifts the economy to the sectors where it is more productive.[7]:276

Another problem with trade barriers and efficiency is rent seekingWikipedia. Sometimes, firms engage in some kind of inefficient activities just to obtain import quotas. For example, suppose that firms in the country A are producing, say, batteries and import one chemical needed as an input. If licenses for the imported chemicals are allocated in proportion to each firm's production of batteries in the previous years, then the firms will likely produce more batteries than they can sell (and at lower quality) just to obtain the import licenses for the following year.[10]:266-67 A famous example of this in practice happened in India in the 1950s and 1960s. Back then, the Indian companies were allocated by the right to buy imported inputs in proportion to their installed capacity. This created an incentive for overinvestment. A steel company would, for instance, build more blast furnaces than it needs just because this would give it a larger number of import licenses.[7]:277 And that's not even the most detestable case of rent seeking caused by trade barriers: firms might engage in bribery or other lobbying activities to obtain benefits. Indeed, one of the reasons why some sectors of the economy are so well-protected and some aren't is because they have a stronger lobby, definitely stronger than the rest of the population.[6]:356

According to Harvard economist Greg Mankiw, among the advantages of free trade, we can mention:[5]:177

  • Increased variety of goods and services: Goods and services around the world are different. Free trade gives people a greater variety to choose from.
  • Lower costs through economies of scaleWikipedia: Some goods can be produced at low cost only when they are produced in a larger quantity. Companies in small countries can’t take full advantage of economies of scale if it can sell only on its domestic market. On the other hand, free trade gives firms access to larger world markets, allowing them to realize economies of scale more fully.
  • Increased competition: Firms that are protected from foreign competition are more likely to have market power and become either a monopoly or a oligopoly, which in turn gives it the ability to raise prices above competitive levels. Opening up trade, on the other hand, fosters competition.
  • Increased productivity: When a country opens up its economy to international trade, the most productive and competitive companies expand their markets. Meanwhile the least productive are forced out by increased competition. As resources move on the production–possibility frontier, from the least to the most productive firms, overall productivity rises.
  • Enhanced flow of ideas: The transmission of technological progress around the world is linked to the exchange of the goods and services that embody such advances. For instance, the best way for a poor country to learn about the computer revolution, is to buy computers from abroad rather than trying to make them domestically from the scratch.

Arguments against free trade[edit]

Over the last centuries, many arguments against free trade have been made, some stronger than the others. Here are some of the most popular ones.

While US manufacturing output has generally increased over time, employment and payrolls have decreased. This indicates massive gains in productivity per employee as well as lasting impacts from the Great Recession.

Free trade and jobs[edit]

This is perhaps the most common argument against free trade, even if it's not a very good one. Free trade in textiles in the US, for instance, would cause the price of textiles to fall, reducing the quantity of textiles produced inside the country. As a result, firms would close and some people would lose their jobs. It is also true that barriers against free trade may create jobs by raising the price of imports and diverting demand toward domestic production since, as domestic demand increases, local companies will hire more workers and unemployment will fall (although it will rise in other countries, as they won't be able to sell to the US).[6]:359

There are, however, more efficient ways to purse high employment, such as appropriate monetary and fiscal policy.[6]:359 But more importantly, however, is the fact that free trade creates jobs at the same time that it destroys them. When the price of textiles falls because of free trade, American consumers have more money that they can use to buy other goods and services. This is of course a good thing for consumers, but this will also create even more jobs in the US as people will spend in other things.[5]:173 And it's not even the only way that free trade increases the welfare. When Americans buy textiles from other countries, those countries obtain the resources to buy other goods and services from the US. Meanwhile workers would move from the textile industry to those industries in which the US has a comparative advantage.[4]:178

Nonetheless, as we saw before, the transition may impose hardship on some American workers in the short run, but the country as a whole would still enjoy a higher standard of living. To relieve the short run problem, some economists suggest that opening up to free trade should be gradual to give people more time to adjust to the new policy environment.[14]

The infant industry argument[edit]

Alexander Hamilton famously proposed encouraging the growth of US manufacturing by protecting "infant industries" from European competition in his Report on Manufactures.

Perhaps the most powerful argument against free trade does not deny its importance, but argues that there are lines of production in which a country could have a comparative advantage if only they could get started, but they would not be able to survive without some protection in the beginning. In other words, developing countries have may have a potential comparative advantage in manufacturing, but they can't initially compete with well-established manufacturing in developed countries, so before accepting free trade, these countries should protect their industries.[7]

The empirical evidence from this argument is mixed. There are many historicals examples where this may have worked in practice, including not only champions of liberal capitalism such as the US and the UK, but also in newly industrialized countries, such as the Asian Tigers. But there are also many historical failures. Brazil is a country that has tried this policy for more than half a century and still couldn't build its competitive computer industry, for instance[6]:358. India and Pakistan also have protected their manufacturing sectors for many years and have indeed recently begun to develop significant exports of manufactured goods. The goods they export, however, are light manufactures like textiles, not the heavy manufactures that they protected. Indeed, it is possible to argue that they would have developed their manufactured exports even if they had never protected manufacturing.[7]:313 Why? Because, to successfully apply such protection, the government also needs to determine which industries will eventually be profitable and decide whether the benefits of establishing these industries exceed the costs of this protection to the countries people (that will, at least in the beginning, have to pay for more products that are probably more expensive and of lower quality), and "picking winners" is extremely difficult. As a result, the government often just ends up protecting those with more political power.[note 1][4]:180 Finally, if an industry young and unable to compete profitably against foreign rivals, but there is reason to believe that the industry can be profitable in the long run, firm owners should be willing to incur temporary losses to obtain the eventual profits, and protection is not necessary for an infant industry to grow.[4]:180[note 2]

In short, at best, the infant industry argument should be used cautiously. For instance, the protection should be temporary and, instead of protecting the whole economy, only some sectors should be protected. But more importantly, protecting the infant industry doesn't compensate inefficiency. Policies such as good public education, macroeconomic stability, legal certainity, etc. should work also take place then.

Key industries[edit]

A variation of the infant industry argument, sharing many of its strenghts and weaknesses, is the idea that it's better to produce computer chips than potato chips. According to to this argument, technology spillovers are pervasive and that the government should encourage those industries that yield the largest spillovers. In practice, however, this sort of proposal often fail since, in order to pursue this policy, the government must to gauge the size of these spillovers from different markets, which is very difficult. As a result, when this policy is implemented, the government often ends up just subsidizing industries with the most political clout.[4]:192 Additionally, most computer chips, are, in fact, cheap, mass-manufactured commodities, while a competitive agriculture is a very dynamic, technological sector too, so it's not even necessarily true that computer chips create more positive externalities. This also shows that choosing which industries are the ones with the really important spillovers is less predictable than it seems. For example, in the late 1980s, many argued that HDTV would be a technology driver other industries. As a result, Japan and the European Union subsidized producers with of billions of dollars while the US lagged behind. Ironically, however, Japan and the EU chose an analog technology that is now obsolete, and HDTV has yet to produce significant benefits for the whole economy (even if it looks good at home).[5]:177 Brazil is also once again a good example of this policy not working very well in practice: very few countries have such an advanced and competitive agriculture.[15] Still, the government tried to boost the computer chip-making industry for over a decade, ultimately failing.[16]

Terms of trade argument[edit]

A very theoretically strong argument, but with limited application is the “terms of trade” argument, firstly developed by the classical political economist John Stuart Mill. If a large country, like the US or China, is able to affect the world prices raises tariffs on imports, the reduced demand for the good in world markets will lower the equilibrium price and reduce the pretariff cost of the good to the country.[6]:358 In other words, sometimes tariffs lowers the price of imports and thus generates a terms of trade benefit. The set of tariffs that maximizes domestic real income is called the optimal tariff. How does this happen? Supposing that the US imposes a 30% taxes on Saudi Arabia oil. In essence, part of the profit of the Saudi oil is now going to the US as revenue from the tariff, allowing the American government to either cut taxes or spend in something else. The price and the quantity of oil being sold doesn’t change very much however. Why? Because in our example the US has, to some extent, monopsony power and the supply of oil is inelastic, so the Saudis have to accept the price Americans are willing to pay, since there is no other place that the oil can go. Which is good for Americans, but bad for Saudis.

So, have we finally found a compelling argument for tariffs? Yes and no. There are some problems with this argument, so it only works under very strict situations.[7]:279 First, it can only be used if the country is big enough to influence the demand of this product (though a group of small countries can perhaps also do it). Second, it is a beggar-thy-neighbourWikipedia argument that impoverishes other countries. Disregarding the ethical problems of such policy, no one expect that other nations will stand idly and do nothing: other larger countries can counter this by raising tariffs themselves. As a result, trade as a whole might be disrupted.

This is it, terms of trade argument, intellectually impeccable, but with limited practical usage.

National security and defense[edit]

Some opponents of free trade argue that some industries are vital to national security. For instance, the American steel companies might point out that their steel is used to make guns and tanks. Free trade could result in the US to become too reliant on foreign countries to supply steel. If a war later breaks out and interrupts the foreign supply, Americans might be unable to quickly produce enough steel and weapons to defend themselves. One other case when this argument is valid is during a pandemic, when you need a quick supply of many products. However, just like the infant industry argument, this argument should be used carefully, as firms often exaggerate their role in national defense to obtain protection, and often lobby to receive privileges.[5]:177[4]:176

Child labor[edit]

Child workers packaging dried bananas in Thailand.

A good case for trade barriers can be made against countries that are too soft on child labor, as they might create incentives for their governments to act. However, restricting trade with these countries can't be the only, or even the main policy to tackle child labor abroad. Trade is not the cause of child labor, poverty is, and restricting trade with these countries will also make them even poorer.[note 3] In fact, evidence suggest that openness to trade reduces child labor.[20]:179

A good example of these problems happened in Bangladesh. In 1992, labor activists discovered that Walmart was selling clothing that had been made by subcontractors who had employed child workers. As a result, the garment industry in Bangladesh dismissed 30,000 to 50,000 child workers. Did these children go to school? Unfortunately, many of them went to work elsewhere, many at jobs like prostitution with even worse conditions and lower pay.[5]:174-76

So, what else can rich countries do in order to alleviate child labor in poorer countries? They can, for instance help to improve the quality of schooling in these countries and lower the opportunity cost of education (such as providing food for the children who go to school).[5]:174-76

Environmental concerns[edit]

A factory in Dalian, China. What a lovely scene.

Some people have argued that some nations will become havens for polluting industries that will operate with few environmental controls. The absence of environmental controls gives these countries, it is argued, a phantom advantage. This is a very complex issue there is no defining evidence on this subject.[21]:704

One study of found that in the long run, free trade reduces pollution by increasing the income of countries, since richer countries typically choose policies to improve the environment.[22] Thus, although free trade and increased development initially may cause pollution levels to rise, in the long run, prosperity is a benefit to the environment. In other words, just like in the child labor case, the problem is poverty, not trade. Another study found, however, that 23% of the greenhouse gas emissions produced by China were created in the production of exports.[21]:704

A report by the World Bank argued that even though trade can exacerbate climate change, it is also a central part of the solution as it has the potential to enhance mitigation and adaptation. The report concludes that trade:[23]

  • Shifts production to areas where the production is cleaner;
  • Helps to spread of environmental goods and services that are necessary for transitioning to low-carbon economy;
  • Delivers critical goods and services that are vital in periods of recovery from extreme weather events.

The OECD has also claimed that free trade can have positive effects on the environment, arguing that, as open markets can expand the access to new technologies that make local production processes more efficient by reducing the use of inputs such as energy, water, and other environmentally harmful substances. Additionally, firms get incentives to adopt more rigorous environmental standards, since, as a nation becomes more integrated within the global economy, its export sector becomes more exposed to environmental requirements imposed by the leading importers.[24]

So, while there might be a case for penalties to be imposed on high-polluting products and/or countries, this is still a complex subject, and some have argued that it is a mistake to bundle trade and environmental issues.[21]:704

The "cultural exception" argument[edit]

Countries may desire to preserve their cultural traditions. France for instance is known for its "cultural exception" policy, that "protects" the French cultural industry from English-language movies.[25] It isn't hard to see at least one flaw on this argument: if citizens believe that the industry is important, they'll consume the products. Making a choice for the population while using their taxes to protect (often rich) entrepreneurs is arguably not the way to go.


  1. Unsurprisingly political influence is one of the reasons why this "temporary" protections often last for so long.
  2. In this case, subsidies also work better than quotas and tariffs.[6]:358
  3. Indeed wealth, not regulations was the reason why countries like the US managed to reduce child labor[17]:78-83 Although child labor still persists in the US,[18] particularly in the agricultural sector, with up to 25% of crops being harvested by underage workers as of 2012.[19] The assertion that wealth and not regulation has helped these workers is questionable, especially in light of the fact that regulations against child labor deliberately exclude agriculture.[19] Although The Atlantic piece proscribes against protective legislation, because "migrant families will lose their children's wages and would be unable to move with available work."[19] The Atlantic instead advocates for increasing wages for adult agricultural workers.[19]

See also[edit]

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  1. "Document – Adam Smith, excerpts from The Wealth of Nations (1776) - Patterns of World History 3e Dashboard Resources - Learning Link". 
  2. See the Wikipedia article on The Lexus and the Olive Tree.
  3. See the Wikipedia article on power (social and political).
  4. 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Mankiw, N. Gregory (2021). Principles of economics (9th edition ed.). Boston, MA. ISBN 978-0-357-03831-4. OCLC 1109789332. 
  5. 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 Cowen, Tyler (2018). Modern principles of economics. Alexander Tabarrok (4th ed ed.). New York, NY: Worth Publishers. ISBN 1-4292-3997-2. OCLC 780401508. 
  6. 6.00 6.01 6.02 6.03 6.04 6.05 6.06 6.07 6.08 6.09 6.10 6.11 Samuelson, Paul A. (2010). Economics. William D. Nordhaus (Nineteenth edition ed.). Boston. ISBN 978-0-07-351129-0. OCLC 244764097. 
  7. 7.00 7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 7.11 7.12 7.13 7.14 7.15 Krugman, Paul R.; Obstfeld, Maurice; Melitz, Marc J. (2018). International economics: theory & policy. The Pearson series in economics (Eleventh edition, global edition ed.). Harlow, England London New York Boston San Francisco Toronto Sydney Dubai Singapore Hong Kong Tokyo Seoul Taipei New Delhi Cape Town Sao Paulo Mexico City Madrid Amsterdam Munich Paris Milan: Pearson. ISBN 978-0-13-451957-9. 
  8. "China-US Trade" (in en-US). 
  9. "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1977" (in en-US). 
  10. 10.0 10.1 Feenstra, Robert C.; Taylor, Alan M. (2014). International economics (third edition ed.). New York: Worth Publishers, a Macmillan Education Company. ISBN 978-1-4292-7842-3. 
  11. Davis, Donald; Weinstein, David; Bradford, Scott; Shimpo, Kazushige (1997). "Using International and Japanese Regional Data to Determine When the Factor Abundance Theory of Trade Works". American Economic Review 87 (3): 421–46. 
  12. "Macroeconomic Consequences of Tariffs" (in en). 
  13. "The World Trade Historical Database" (in en). 2018-07-28. 
  14. "Finance and Development" (in en-US). 
  15. "USDA ERS - Brazil’s Momentum as a Global Agricultural Supplier Faces Headwinds". 
  16. Audi, Amanda (2021-11-04). "Brazil liquidates its chip-making company amid a global shortage. Here's why" (in en-US). 
  17. Galor, Oded (2022). The Journey of humanity: the origins of wealth and inequality. United States: Dutton. ISBN 978-0-593-18599-5. 
  18. Fast-food giants overwork teenagers, driving America’s child labor crisis: More than three-quarters of child labor violations in the first nine months of 2023 were in food service, with most of those at franchised brands. by Lauren Kaori Gurley & Emmanuel Martinez (January 14, 2024 at 7:00 a.m. EST) The Washington Post.
  19. 19.0 19.1 19.2 19.3 York, Helene (March 26, 2012). "Do children harvest your food?". The Atlantic. 
  20. Edmonds, Eric; Pavcnik, Nina (2004-02-29) (in en). International Trade and Child Labor: Cross-Country Evidence (Report). National Bureau of Economic Research. 
  21. 21.0 21.1 21.2 Case, Karl E.; Fair, Ray C.; Oster, Sharon M. (2017). Principles of economics. Always learning (Twelfth edition, global edition ed.). Boston: Pearson. ISBN 978-1-292-15256-1. 
  22. Antweiler, Werner; Copeland, Brian R.; Taylor, M. Scott (2001-09). "Is Free Trade Good for the Environment?" (in en). American Economic Review 91 (4): 877–908. doiWikipedia:10.1257/aer.91.4.877. ISSN 0002-8282. 
  23. Brenton, Paul; Chemutai, Vicky (2021-09-29). The Trade and Climate Change Nexus: The Urgency and Opportunities for Developing Countries. Washington, DC: World Bank. ISBN 978-1-4648-1770-0. 
  24. "How are trade and environmental sustainability compatible". 
  25. See the Wikipedia article on Cultural exception.