In an ever more global world, the free trade vs. protectionism debate comes up often. Trade between nations has always been both contentious and necessary. In some industries, nations may be more progressive and open to negotiate, but other industries may be negotiated more fiercely with a strong protectionist hand. Trade wars and negotiations are never far from the headlines, but why does trade matter and what is there to “protect”?
While having no barriers in world trade and protecting a nation's domestic industries both sound good on paper, neither works when done to extremes. Instead, modern economies favor free trade with some protectionism on the side.
In Simplest Terms: Protectionism
When someone fences in a vulnerable tree they're growing, it’s akin to protectionism in trade. For domestic industries considered vulnerable but valuable, countries may negotiate trade clauses to protect that industry, like Canada does with its dairy in treaties with the United States, to protect Canadian dairy farmers. By doing this, countries try to shield such industry from perhaps the lower overhead or labor cost or any other perceived advantages held by the other treaty nations. Among the advantages of protectionism is that it does initially protect home industries.
Sometimes this protection is achieved by raising tariffs on that nation’s goods in order to protect their own industry, like perhaps increasing tariffs on Mexican produce to protect California and Florida’s agricultural industries. The tariffs get factored into the pricing and, when consumers pay for those Mexican avocados, the base price is higher because it’s the retail cost plus tariff that becomes the sticker price for shoppers. This makes the California avocado more competitive on the shelf now because its higher production cost is now more in line with the heavily tariffed Mexican avocado, thus leveling the playing field while taking away what should have been Mexico’s advantage.
At first glance, this seems like a brilliant plan, but the problem is that other countries are advocating for themselves too, and when countries like Mexico or China begin to perceive the other nation, like America, as playing too heavily into their own favor, negotiations escalate, tariffs can begin amounting and the loser is nearly always the consumer, whose cost of living is increasing with every new tariff tacked on. Economic isolationism has been harmful to countries in the past, which is why free trade is now the order of the day.
Understanding Free Trade
The opposite of protectionism is free trade. In its purest form, free trade is trade conducted freely with no tariffs, quotas or other restrictions. Like most pure philosophies, it is rarely ever conducted "freely" — but nations often lower tariffs, restrictions and quotas tremendously among their favored treaty partners.
Lowering the barriers to trade for countries importing their products to America, though, means American companies may be unfettered by tariffs into those trading nations. This is a huge incentive to industry, and many credit the boom of post-war America to trade barriers falling world-wide.
The problem free trade has, though, is that the public and economists disagree on its benefits. The public sees free trade as making it far too easy for companies to relocate or outsource labor to foreign nations, eliminating American jobs in the process. Economists, though, are seven times more likely to favor free trade than the Average Joe or Jane is, and this is because evidence supports that businesses and industries benefit when they have greater access to sales markets both at home and abroad.
Limited Free Trade
But even economists understand that completely free trade could generate chaos in the markets. Those Mexican avocados, for instance, are a case in point: As overhead is cheaper in Mexico, so are labor costs and even gas. When they export produce to America, they sell for American dollars, which can be leveraged against the Mexican peso for greater profitability. And they can sell for lower than the American market rate for avocados yet still make more revenue per fruit than their neighbor Californian farmers make.
Enter at least a nominal tariff on imported avocados. Sure, the avocados may still sell cheaper, but that's why PSAs trumpet the “buy American” refrain to encourage patriotic shopping. Plus, there’s always the quota limits for import — sure, you can sell your cheaper Mexican avocado in Oregon, but you can only sell X amount of cases. The same routine plays out with things like shoes from Mexico, rice from China and electronics from Japan.
In fact, protecting American businesses is always an undercurrent in trade. No trade with America is truly free. Some element of protectionism always remains, but there is seldom the extreme economic isolationism. Every nation on the planet protects its own interests too, but they just all realize that having trade conducted more freely is in everyone’s interests, to a degree.
Arguments Against Free Trade
Citizens worry about free trade on a few levels. They’re worried foreign products may sell more cheaply and put local businesses on life support. Even in developing regions that can benefit from trade, citizens sometimes worry businesses and international corporations may benefit too greatly from their reduced market oversight; they even worry that these entities could gain too much power over the nation’s environment and/or politics. Other arguments against free trade include:
Outsourcing: When trade barriers come down, incentives for international expansion often go up. When the North American Free Trade Act increased trade between Mexico, Canada and the United States, workers’ worst fears happened when jobs did in fact get outsourced to Mexico, where wages were lower and so was overhead.
Reduced Revenue: Even with free trade agreements, America takes in around $40 billion in tariff revenue annually. For smaller, poorer countries, reducing tariffs on products that are uniquely theirs can hurt their national coffers while sales of the products tend to benefit select people.
Environmental Destruction: Emerging markets tend to leave their environment unprotected, allowing corporations to go in and take advantage of natural resources with impunity. This frequently happens in industries like mining.
Theft of Intellectual Property: Other markets may not protect intellectual property, and it’s not uncommon for, say, an American product to run into counterfeit or badly made duplicates of their merchandise being sold at cut rates in foreign markets.
Why Free Trade Keeps Winning
But, in the end, free trade dominates the globe right now because the incentives tend to outweigh the consequences. In globalization, everyone contributes a piece to the puzzle. With modern transportation and online business, it’s almost as if borders are a thing of the past.
Countries still enact some protectionism, but it’s also the era of the multinational corporation. Many companies gain considerably from free trade agreements, especially when they can have operations on the ground in more than one region, capitalizing on lower costs and more favorable labor conditions in other countries.