Why Free Trade Is Far More Preferable Than Protectionism

Free Trade vs Protectionism

The financial meltdown of 2008 and the resulting deep recession have brought enormous pressure upon the governments of the many nations of the world including the United States. The world economy has been remarkably slow in recovering from this sharp downturn. The resulting unemployment, slow GDP growth, and continuing depressed housing markets stubbornly persist. Politicians often look for quick fixes during these times of severe economic distress. Protecting domestic industries sounds like the the logical action to take under these conditions. Unfortunately these same politicians do not consider the long term implications of protectionism. They need to examine history, macroeconomics, and foreign policy before making these hugely momentous decisions. All policy actions have reactions and thus they often have dire consequences. Often these consequences create much more damage than the initial problem ever did. In this article I will describe the four main types of protection that a country may provide to an industry or the economy itself. They are tariffs and quotas, industry subsidies, currency manipulation, and import product regulations. Furthermore I will present both the benefits and the dangers of each of these forms of protectionism. Finally I will attempt to give you a full global picture of why free trade is a far more preferable long term policy than protectionism.

Let us start with the most common forms of protectionism which are tariffs and quotas. Pure free trade exists when countries trade with one another without placing any barriers upon any of their trading partners. In other words all nations would be trading on a level playing field. However many nations decide to protect one or more of their industries by placing tariffs on imports from other countries within that industry. They may also place quotas limiting imports relating to that industry. Tariffs make imports more expensive compared to the products of the domestic industries. Quotas overtly limit imported products from other nations. These forms of protectionism are often instituted to protect a developing domestic industry or a declining one. Third world developing nations use these mechanisms to allow their infant industries to grow and solidify. Unfortunately many of these nations become addicted to these methods and fail to remove them when the protected industry matures. Some political leaders in the developed world feel political pressure to save a domestic industry of theirs when it is declining. This is usually because companies in the developing world are gaining ground on them quickly due to wage cost advantages. These countries are still poor so their wages are naturally much lower at this point. This type of protection is usually futile due to these vast wage differences. It is also counterproductive to trade in general. The Smoot-Hawley tariff was passed by the U.S. Congress in 1930 during the height of the Great Depression to protect primarily their agricultural industry. The tariffs were record highs at the time and it sparked a worldwide trade war that further exasperated an already decimated world economy. The U.S. also negotiated quotas with Japan on steel and automobiles in the 1980s to protect these declining industries. They were successful but only to the extent that they left extremely shrunken domestic industries for those products. The lesson to be learned from this is that negotiation works. Unilateral trade actions often spark trade wars which hurts everyone involved very badly.

Another form of protectionism utilized by many countries is industry subsidies. This method is generally used to help fledgling industries grow or to protect mature industries from unfavorable market conditions. Giving help to a growing industry is a norm for most countries whether they are developed or not. Developing nations do it to establish new industries and to grow their economy. Developed countries normally utilize this method to move off declining industries and establish more advanced industries such as biotechnology or alternative renewable energy. Sometimes these developed nations use this method as protection for an aging or vital industry. The United States provides very large subsidies to its farming industry. These subsidies were first implemented during President Franklin Roosevelt's administration as part of his New Deal during the Great Depression. Prices for farming crops had fallen to rock bottom levels and farmers were going bankrupt in record numbers. The U.S. food supply was now being threatened and something needed to be done. The Roosevelt administration instituted a number of programs and subsidies that allowed farmers to stay in business and make a livable income. This worked very well and has continued to be used to ensure a stable farming economy. Unfortunately these programs have become institutionalized and farm subsidies are now the norm. My belief is that they should only be used as a backstop to ensure that farmers do not go bankrupt and not to ensure a certain income level for farmers. This is a prime example of a misuse of industry subsidies. The proper use of subsidies is to employ them to meet vital national needs such as developing a cutting edge industry or ensuring that a national security requirement is met.

The third major form of protection that nations use to aid their industries is currency manipulation. All nations perform currency manipulation at one time or another. Most nations have a broad range in which they feel it is safe for their currency to fluctuate without damaging their economy. Any fluctuations beyond this are usually deemed a threat to their economy and the government will take action to bring that currency back into the acceptable trading range. A strong currency favors cheap imports, lower inflation, and lower interest rates. A major disadvantage is that your exports are are more expensive hurting most of your domestic industries. Conversely, a weak currency aids your domestic industries greatly but could lead to higher interest rates and higher inflation. The major problem regarding currency manipulation occurs when a nation conducts this method with the goal of obtaining a competitive trade advantage over other nations. The prime example of a country employing this form of protectionism currently is China. The Chinese economy is overwhelmingly driven by their export industries. Their economy would begin to stall without the component of consistently rising export levels. This growth is critical to the retention of power for the Chinese Communist Party government. Of course the Communist name is misleading in this case because the Chinese economy is now actually a Capitalist economy. The problems the Chinese government is faced with involve the lack of democracy as well as the fact that their country has a population of 1.3 billion people and growing rapidly. They need to maintain the growth of their economy to support China's massive population. There is also a large group of their citizens that remain in poverty. This is additionally critical for the ruling Communist party due to the fact that their populace does not have elections as an outlet for their frustrations. Therefore the Chinese government employs currency manipulation as a means to keep their export industries strong and to maintain a huge trade surplus. This in turn allows the government to use the funds from this surplus to buy up dollars on the open currency market. This is the mechanism that the Chinese government uses to keep the Chinese Yuan value low relative to the U.S. dollar and other world currencies. It not only helps their export industries but it hurts the export industries of other countries making it a very unfair trading practice. They are not the only offender of this sort but they are certainly the most prominent and blatant practitioner.

Finally we turn to import product regulations. As with the other three forms of protectionism, regulating imports can be a double edged sword. This method is key to ensuring that the products imported into a nation are up to the quality standards that the receiving nation holds for its own domestic products. Some nations, especially developing ones, look the other way in regards to ensuring high quality standards for the products of their exporting industries. Their main priority is usually facilitating the rapid growth of their industries rather than maintaining the safety and quality of their products. China has been implicated in several scandals regarding dangerous export products in recent years. One was a recall of poisonous pet food in 2007. Another example is an ongoing problem with sub-standard dry wall that is damaging many homes in the United States. The Chinese government has begun punishing these industrial malefactors severely when these instances of gross neglect or incompetence are found. This is an attempt to uphold China's industrial reputation before it substantially hurts its exports. There is still a lot of improvement that needs to be done. The U.S. and all other countries must remain vigilant and take action against offenders such as this to ensure that these practices are halted. Developing countries already have a substantial advantage in regards to labor costs. Taking shortcuts on quality should never be allowed both for safety reasons and trade fairness. This is the proper and necessary use for import product regulations. Unfortunately some nations utilize extraordinarily onerous regulations on imports as a means of excluding them from their country. These nations use this method to effectively block certain imports from entering their country much like tariffs and quotas operate. They get the benefit of this result without appearing to be protectionist. The bottom line is that regulations should be used for the protection of their nation's citizenry and not for the promotion and protection of their domestic industries.

I have now outlined the four major forms of protectionism. My belief is that all nations will become more prosperous in the long run as more trade protections are dropped and trade becomes freer. Of course nations do not operate within a utopian world. Some countries are marvelously wealthy with a myriad of resources. Others have been poor for centuries due to geography, wars, nature, or government corruption. These are the major reasons for a nation's poverty though by no means the only ones. Therefore different governments have different problems and pressures. Developing countries have fledgling industries to nurture while developed ones have jobs in declining industries to preserve. I believe protection should only be given in three situations and even then only on a limited basis. The situations are aiding a brand new industry to start up and develop, protecting an industry that is vital to national security, and the using of regulations strictly to exclude dangerous products from entering one's country. All other trade problems should be handled through in depth trade negotiations. People lose their lives when nations enter into shooting wars. People lose their jobs when nations enter into a trade war. No one wins in either of these types of wars. Nations close down their trade markets during a trade war shrinking the field for everyone. Trade negotiations are the most optimal way to settle trade disputes. This is true in state diplomacy among nations just as it is with trade negotiations. The North American Free Trade Agreement (NAFTA) is an excellent example of successful trade negotiations that have benefited all nations involved. Now it is true that some U.S. jobs have been lost primarily in older low-tech industries. Conversely lower market barriers have expanded the market share of our hi-tech industries which greatly expanded job creation in these areas which represent our future. This is the model of economic progress we should be striving for all over the world. The World Trade Organization (WTO) embodies this. The WTO is an outgrowth of the General Agreement on Tariffs and Trade (GATT) which was a set of trade rules agreed upon by many nations in 1947. It was negotiated under the auspices of a United Nations conference on trade. There were eight rounds of negotiated agreements under GATT which each time substantially lowered tariffs and other barriers among the participating nations. GATT was replaced by the WTO in 1993. The major difference between the two is that the WTO is an actual institutional negotiating body and not simply a set of agreements. The WTO and smaller trade negotiations such as the one that resulted in NAFTA are the best mechanisms to open up all trade markets and expand the world economy. Our world is a much smaller one now due to the incredible advances in communications and transportation. These are wonderful developments which if handled correctly and openly among nations should result in a more prosperous and peaceful world. I know this sounds like a "Pollyanna" viewpoint especially with all the tumult going on in the world presently. Yet think about how the idea of democracy has been spreading like wildfire in the Middle East. Dictatorial tyrants are quaking in their boots. Practically instantaneous information transmission via the internet has sparked this. It has also given the tools to millions of entrepeneurs around the world to start up companies and grow them. Barriers among nations are coming down by way of this information phenomenon without any input of world governments. I hope to see them get onboard this train and continue to negotiate to tear down protectionist barriers on the road to free trade. We are inevitably moving in that direction anyhow. Let us accelerate this process and make this a better world for all.

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Comments 35 comments

amillar profile image

amillar 5 years ago from Scotland, UK

Very useful info. I'll be reading more of your articles.


HSchneider 5 years ago from Parsippany, New Jersey Author

Thank you Amilar for your very kind comments. I look forward to any input you wish to impart.


CHRIS57 profile image

CHRIS57 5 years ago from Northern Germany

I agree with your approach, HSchneider. Protectionism won´t create benefits for the "protected" on the long run.

Almost every economy applies some kind of protectionist measures. But some (more successful) economies use protectionist means to assist their economic policies.

However, even if i think protectionism is generally bad, there can be identified creative, destructive and patriotic protectionist means.

Creative i would call those measures, which are used to support economic policies.

Destructive measures in my opinion are import taxes and tariffs, because they only increase prices, isolate from competitive edge and end up in bureaucratic monsters.

Patriotic measures are moral campaigns and slogans like "Buy American"," Made by people who care".. Those are hollow phrases and only create curiosity.


HSchneider 5 years ago from Parsippany, New Jersey Author

Thank you for your comments Chris. I agree with you that there are some patriotic measures. Giving subsidies for future growth industries like biotechnology and alternative renewable energy are two examples. All countries do it but if it is for a dying industry, it's simply spitting into the wind. Besides, if reciprocal measures are taken and that escalates, a trade war could erupt. Then no one wins. I appreciate your insightful thoughts.


tonymac04 profile image

tonymac04 5 years ago from South Africa

I am no economist and yet I have a feeling for the benefits of free trade.

At the same time I think that a country like mine, South Africa, in which agriculture is a major player, has a problem when trying to compete with countries which have heavily subsidised agricultural sectors, like the US and the EU. I think our agricultural sector would be wiped out very quickly if agricultural products from either were allowed free entry. As it is, with a very high unemployment rate our clothing and textile industries have been very hard hit by cheap imports from Eastern countries were input costs are far lower than ours. It seems a difficult balance.

Thanks for the very useful info.

Love and peace

Tony


HSchneider 5 years ago from Parsippany, New Jersey Author

It is a difficult balancing act Tony. I wish the U.S. and everyone else would negotiate with the rest of the world and drop all of these subsidies. Dropping yours unilaterally would be folly. My basic argument is that all countries should strive and continually negotiate to free up all markets. The U.S. has lost millions of jobs from cheaper goods around the world. But we must now move into higher technology fields and be on the cutting edge. Education reform and improvement is key for us and any country to be able to make this shift. Thank you as always for your insightful comments.


Terry.Hirneisen profile image

Terry.Hirneisen 5 years ago from Shenandoah Valley

Some countries use cheaper labor or even child labor. The environmental laws are certainly different. These things always give me pause when discussing free markets. So if these things are not considered in a free trade agreement I don't really think it is free trade. What say you my friend?


HSchneider 5 years ago from Parsippany, New Jersey Author

All things must be taken into consideration when conducting trade talks Terry. Cheaper labor is natural in developing countries and there is nothing we can do about that. Poorer countries have lower wage levels. We need to move off these industries into higher technology industries. Those countries that utilize such hideous tactics such as child or slave labor must be sanctioned against. My most important points are that we need to continually seek reductions of trade protection around the world wherever possible. This includes eliminating unfair practices. Also, the U.S. and other developing countries need to let declining industries that are not vital to national needs go.


Jillian Barclay profile image

Jillian Barclay 5 years ago from California, USA

Dear HSchneider,

Sorry I missed this when you first printed it. I agree with your theories, but think that the road blocks (like Terry does in his comment)to free trade such as slave labor, child labor, etc. will always exist and while other governments may sanction, the practice won't stop...

As for moving into higher technology and the education required to support technology, the powerful in this country do not support additional funding for education. The GOP is cutting education every chance they get.

When I look at the technology of wind, solar, even water power, I think that we could become the export capital of not only the technology, but the products required to support the implementation of the technology. But the oil industry has a stranglehold on Congress. Little money appropriated for the research and development of alternate energy sources, and the industry cannot grow.

We keep shooting ourselves in the foot, so to speak.

Hope you have submitted some of your writing to the NY Times. Your writing is so articulate! Maybe your common sense, backed up by your knowledge, could change some minds and inspire the powerful to do something beneficial for a change!


HSchneider 5 years ago from Parsippany, New Jersey Author

That is no problem Jillian. We all have busy lives. I'll be gone for 5 days beginning this Saturday. I'm off on a short cruise to Bermuda. I agree we have to worry about other unfair trade packages but cheaper labor in developing countries is not one of them. Unfortunately it is the natural state of things. Eventually they become developed and face the same problems. I do hold the same worries as you about the new GOP House. Cutting education and investment in cutting edge technologies is just insane and jeopardizes our future. As for the NY Times, I really don't know how to go about doing that or if it is really worth it. They are so big and get so many submissions, I'm not sure it would even be read. My fiancée gives to the President Obama campaign and the Democrats dating back to 1980. She wants to send in money with some articles next time. I doubt they would even be read. Thank you as always for your comments and kind encouragement.


Credence2 profile image

Credence2 5 years ago from Florida (Space Coast)

Thanks, HS, the Chinese and others are beginning to recognize that innovative free markets require free people, ultimately. The current Government of China is inconsistant with this and look for changes in the not too distant future.

In a free market we remain at a distinct disadvantage unless we immediately prop up R and D and move people into higher tech industries, those that at the present time do not have a cheaper knockoff elsewhere. That is, of course, if we wish to maintain our current standard of living. That means that we have to invest in technology, research and education if we are to successfully embrace the future,

Great Hub HS


HSchneider 5 years ago from Parsippany, New Jersey Author

Perfectly and succinctly put Credence2. China will have to change but I'm not sure it will be in the near future. The U.S. has to invest in education, research, and hi-tech or it will fall behind and eventually become on the level of a developing nation. The conservatives today seem to want to hasten this by eliminating all spending in the areas you mentioned while also eliminating the minimum wage and workers rights. I don't think any of us want to live in that economy. Thank you for your perceptive comments.


Fay Paxton 5 years ago

Hi Schneider. Sorry it took me so long to get here; I've been offline.

I commend you for explaining a complex subject in terms that are understandable. Clearly, there will be barriers to a level playing field in areas of trade as long as some countries indulge in child and slave labor. Unfortunately, they will always exist.

On the other hand, I find myself laughing at the accusations of China's currency manipulation. All countries do it and the United States is no exception...we print currency and set interest rates.

In the final analysis, the problem is that we have little to export because we don't make anything anymore. Green technology is a chance for us to lead in something once again. We must continue to invest in education, research and technology...all the things the idiot Republicans want to destroy. Don't get me started!

We seem to do an excellent job at raising one anothers pressure. :)

up/useful, awesome and bookmarked.


HSchneider 5 years ago from Parsippany, New Jersey Author

Yes we do raise each other's blood pressure Fay. But in the current political environment, it is justified. You are correct that all countries utilize protectionism and manipulate currency rates. It's just that China is particularly grievous at it right now. They already have huge wage advantages as it is. Don't get me started with investments in our future. You know if the current GOP has its way, we would invest in nothing except tax cuts for the corporations and the wealthy. Simply put, we must continually negotiate to bring these barriers down. Thank you as always for your wise comments Fay.


Storytellersrus profile image

Storytellersrus 5 years ago from Stepping past clutter

I agree that it is very important to study history. I think you might find support for your argument here, at the link I copied in a comment on James Watkin's hub:

http://www.heritage.org/Research/Lecture/The-Lesso...

There is hope, with minds like yours working the system. thanks.


HSchneider 5 years ago from Parsippany, New Jersey Author

Thank you for the link and your kind comments. Sorry I did not reply sooner. I was away on vacation. Too many people I find simply act or react in a number of fields without studying history to learn its lessons. That is not to say that one should operate strictly by way of history. It never strictly repeats itself. But it often reveals cautionary lessons that can teach anyone in regards to different issues. It also helps in studying up on an issue which I find many do not. Knee jerk reactions drive me crazy.


Wil C profile image

Wil C 5 years ago from United States of America

This article should be read by everyone. It explains in detail how we as a nation must work with others to maintain our ability to export and provide our people with the goods it needs to survive. Most importantly it exposes the Chinese, who are driving our dollar into the ground with their cheap labor given to them through their dictatorship. The good thing is, I believe our government is fully aware of this and implementing measures to improve our manufacturing and give us a fighting chance. Now we just have to hold the Chinese accountable for all the idea theft they so comfortably enjoy. I don't agree with Trumps approach, but his sentiment isn't too far off.


HSchneider 5 years ago from Parsippany, New Jersey Author

Thank you for your kind comments Wil C. It was natural for the Chinese government to protect their fledgling industries in past decades. But they are mature now and China needs to integrate themselves into the world economy especially by allowing its currency to float freely. There is nothing we can do about their cheap labor since they are still developing but the currency manipulation must stop.


AKA Winston 5 years ago

Ravi Batra in his book "The Myth of Fee Trade" from back in the nineties showed an almost clairvoyant understanding of the implications of free trade. He predicted that free trade would result in the U.S. conversion to a service economy from a manufacturing economy and thus leading to the demise of the middleclass.

His reasoning was simple: service jobs do not pay anywhere close to manufacturing, and by opening up competition from world labor markets, the U.S. laborer would stand no chance to compete.

What we have seen is a reduction in the percentage share of productivity gains for the working class, a polarization between wealth/poor, and a U.S. that relies on WalMart to feed and cloth the masses.

What befell the U.S. and world was not a recession, but a debt crisis. The comparisons to 1929 are valid. The speed of recovery is consistent with a debt crisis, which is why we are not seeing the normal business cycle recovery.

The reasons for the debt crisis can be found mostly in a misguided attempt to replace lost productivity gains with debt accumulation. Instead of wages, the U.S. household took on insurmountable debt obligations.


HSchneider 5 years ago from Parsippany, New Jersey Author

AKA, I agree with you that we have been living off the National Credit Card for the past 10 years instead of addressing our internal problems. I would also argue that the reason we are falling behind the rest of the world in trade is that we have failed to invest in newer technologies and also education. Developing economies are naturally going to be more competitive against us in mature industries because their wage scales are still much lower than ours. Our economic future is in developing technologies. Low paying service jobs have become more of the norm in the U.S. because we have failed to make these investments. Thank you very much for your comments.


Dennis AuBuchon profile image

Dennis AuBuchon 5 years ago

Great article. Our government officials should read this. You had a great way to present the facts with each option and the consequences.

Keep up the great work.


HSchneider 5 years ago from Parsippany, New Jersey Author

Thank you Dennis. I try to be balanced and thorough when I write about issues. I believe it is important to do this so we can find real solutions and also to know which politicians are telling the truth and which are lying.


Dennis AuBuchon profile image

Dennis AuBuchon 5 years ago

In my writing I also try to be balanced as I feel it is in the interest of the reader to know both sides of an issue. I believe in presenting all the facts not just a portion of them.


HSchneider 5 years ago from Parsippany, New Jersey Author

I've read several of your Hubs and you do just that. They are balanced and thorough. Excellent work. Bravo.


Shahid Bukhari profile image

Shahid Bukhari 5 years ago from My Awareness in Being.

What would you say ... if I Said ...

"Free Trade [in a Global Village] ... is rendering most nations to the Status of Raw Material Producers ... and few ... to the Position of Value added, $25000 Per Capita Income, Producers ...

by Selling back, the Raw Material Value added Products ... till they virtually "buy" for Free ... all the Raw Materials ... needed.

Is it not the worst kind of Protectionism" ... favoring Cartels and Monopolies ... at the cost of all other humans ...

Is it not the worst plague ... ever to have infested the World !

Reckon no Nobel Prizes are involved here ...


HSchneider 5 years ago from Parsippany, New Jersey Author

I agree with you Shahid that the state of free trade that you depict is a toxic one. But countries neede to develop themselves to get out of this state of raw material seller. Some do it very well and are developing rapidly such as China, India, and Brazil. Others are stuck in inept or corrupt governments that steer and keep them in poverty. Thank you for your comments.


Sanxuary 3 years ago

There is no such thing as free trade. Just Corporations and bankers who forced every small farmer out of business to consolidate holdings. Lower wages as slaves are created elsewhere. We no longer even make our own shoes. Study Globalism and the IMF and see why we have poverty World wide and no jobs in America.


HSchneider 3 years ago from Parsippany, New Jersey Author

I agree that there is no such thing as free trade but it is an idealized condition of commerce that most people and nations strive for at least in public. Corporations and bankers do continually attempt to rig the game to their own advantage. It is the major part of capitalism that is the problem and must constantly be monitored and remedied. Still I believe freer trade is a condition that we should continually strive for. Optimum prosperity is found there. Vigilance is necessary to correct a rigged game but that does not preclude the free trade journey. Thank you for your comments, Sanxuary.


Tolovaj profile image

Tolovaj 2 years ago

Free trade is somehow similar to democracy. It's an ideal, but in reality never really works. If we have somebody who controls trading (or can change laws), the abuse of this power is inevitable. If we try to impose more control, things become more and more complicated (and expensive) until the ordinary citizen stops believing in ideals.

Thank for your food for thought!


HSchneider 2 years ago from Parsippany, New Jersey Author

Thank you for your insightful comments, Tolovaj. You are correct that it is an ideal and one that should always be strived for. Unfortunately very imperfect leaders then use trade for their own selfish political reasons.


Gordan Zunar profile image

Gordan Zunar 2 years ago from New York

I like the article, it's something I argued about in the final exam in high school, where I was asked whether I favored liberalism or protectionism. My answer was liberalism because it promoted free market trade and an open economy. I used the EU as an example, where all member states share a common market. I consider protectionism to be associated more with conservatism and the choice of the two (liberalism and protectionism) to be influenced by the political ideology of the ruling party.


HSchneider 2 years ago from Parsippany, New Jersey Author

Thank you for your comments, Gordon. I believe free market trade lifts all economic boats eventually by broadening markets. Those that close their markets should be coaxed to open up sometimes with sanctions. You are correct that a political party's ideology will usually define their stance on trade.


Kristen Howe profile image

Kristen Howe 19 months ago from Northeast Ohio

HSchneider, this is a great hub. It could use an update with photos, ebay/Amazon capsules if applicable, a video and a poll. Just my two cents. Voted up for interesting on the free trade.


HSchneider 19 months ago from Parsippany, New Jersey Author

Thank you very much for your comments and suggestions, Kristen.


Kristen Howe profile image

Kristen Howe 19 months ago from Northeast Ohio

My pleasure. Anything to help fellow hubbers out.

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