Free Trade Vs. Protectionism
Clarke Ricks School of Business,
Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
June 8, 2022
Free Trade Vs. Protectionism
The international economic battle that President Donald J. Trump is waging on China as a
well as on the U.S.'s closest allies is a full-fledged example of free trade versus protectionism.
Trump argues that the U.S.'s trading partners have taken unfair advantage of the open market
that this country has offered for decades. He says that other countries are intentionally
dumping goods into U.S. markets that are priced unfairly due to lower labor costs and
government assistance to business in those nations.
He has imposed stiff tariffs – essentially taxes on foreign goods imported in this country –
and threatens to impose more. Tariffs will raise the price of foreign goods seeking to enter this
country because companies that send those good will have to pass the costs onto consumers.
The result will be far fewer goods entering this country.
China and the U.S. allies who are slapped with these tariffs counter that such economic
restrictions will hamper world trade and cause the prices of goods and services to rise. They say
that free and unfettered trade – trade that is unhampered by tariffs – is the best path forward.
They argue that markets that are not restricted, where foreign goods can pass the borders of
this and foreign countries without the fear of onerous tariffs, are the best bet for the global
economy.
Free Trade vs. Protectionism Basics
Free trade means just what the name implies: free and unfettered trade between
countries, unhindered by steep tariffs, and where goods can pass over borders unmolested by
any restrictions. By contrast, protectionism also means what the name implies: It's the process
where governments slap stiff taxes – tariffs – as well as a host of restrictive regulations on
goods that other countries want to export.
The net result is that the torrent of goods flowing into a country slows to a trickle.
Trump's threats to impose tariffs on some U.S. trading partners is a classic example of
protectionism. The arguments by China and the other U.S. trading partners that trade should be
unrestricted is an example of free trade.
Protectionism Pros and Cons
On first look, Trump's argument for protectionism (though he certainly doesn't call it that)
would seem correct. "The Wall Street Journal" notes that the U.S. has a $375-billion trade
deficit with China. As of June 2018, the Trump administration was involved in heated
negotiations with China to knock $200 billion off that deficit by forcing China to open its
markets. (China does place many restrictions on goods that U.S. companies want to export to
the Asian country.)
But, protectionism is a slippery slope. The U.S. has tried protectionism before via the
imposition of heavy tariffs on its European trading partners. The result: The Great Depression.
In the early 1930s, the Smoot-Hawley tariff was enacted in the U.S., sparking "the most
infamous case of protectionism in history," says Bruce Bartlett, writing on "The Fiscal Times."
Congress passed the Smoot-Hawley act in 1930, and the results were disastrous:
The price of imported goods rose 5 percent
America's trading partners retaliated and sharply curtailed their U.S. exports
World trade shrank, leaving many countries unable to service their debts left over from
World War I
Economists debate the overall impact of the protectionist Smoot-Hawley act, but the late
economist Jude Wanniski called it the principal cause of the depression.
Free Trade Advantages
That unhappy history would seem to tilt the scales toward free trade. Free trade is good
for the global economy, say Donald J. Boudreaux, a senior fellow at the F. A. Hayek Program for
Advanced Study in Philosophy, Politics, and Economics, and Nita Ghei, director of policy editing
at the Mercatus Center at George Mason University. They add:
"Free trade increases prosperity for Americans – and the citizens of all participating
nations – by allowing consumers to buy more, better-quality products at lower costs. It drives
economic growth, enhanced efficiency, increased innovation, and the greater fairness that
accompanies a rules-based system. These benefits increase as overall trade – exports and
imports –increases."
The two further note that restrictions on foreign trade often harm the very people they
aim to protect: American consumers and producers. Protectionism limits the choices of what
Americans can buy, and drives up the prices of everything from clothing and groceries to the
materials manufacturers use to make everyday products.
Free Trade Disadvantages
But a major minus against free trade is the very same argument that bolsters
protectionism: Free trade tends to increase trade deficits in some nations to potentially
disastrous levels. America has a widening trade deficit with almost every country it trades with,
notes, "The New York Times." The NYT quotes President Trump as saying: “We lost, over the
last number of years, $800 billion a year" – a figure the "Times" does not dispute. The NYT said
that Trump had overstated the U.S.'s trade deficit with China, noting that it is"only" $375
billion.
Every dollar in trade deficit, generally sparked by free trade, means a dollar taken from
U.S. workers and, instead, going to workers overseas. The result is lost jobs in the U.S. as other
countries, with much lower labor costs and often with business supported by government
assistance, gain jobs.
So, Which Is Best: Free Trade or Protectionism?
There is no easy answer. The "New York Times" does agree that the U.S. trade deficit is
near $800 billion. But, says the "Times," the trade deficit is not necessarily a bad thing:
"Most economists do not see the trade gap as money 'lost' to other countries, nor do they
worry about trade deficits to a large degree. That’s because trade imbalances are affected by a
host of macroeconomic factors, including the relative growth rates of countries, the value of
their currencies, and their saving and investment rates. For instance, America’s trade deficit
narrowed dramatically during the Great Recession, when national consumption faltered."
The "Times" and other advocates say that free trade strengthens the world economy.
Others argue that free trade harms the economy of countries like the U.S. In a study, labor
economists David Autor, David Dorn, and Gordon Hanson found that the recent surge in
Chinese imports to the United States "has inflicted pronounced harms on the wages and labor-
force participation of U.S. workers in local markets."
Yet others, such as the conservative magazine, "The National Review," argue that free-
trade pacts, such as the North American Free Trade Agreement (NAFTA), have only benefited
the U.S., which added 30 million jobs after the free-trade pact was enacted in 1992.
The arguments are endless. Clearly, though, the free trade vs. protectionism debate, is not
going to fade anytime soon.
