If Free Trade Makes Nations Richer, Why Do So Many Countries Still Rely On Protectionist Policies?

I would argue that protectionism persists not because free trade fails economically, but because it creates political, social, and strategic costs that governments cannot ignore. Free trade is an economic theory that allows the unrestricted exchange of goods and services across borders without tariffs, quotas, subsidies (for example voluntary exchange restraints and dumping), export restrictions or any other barrier on international trade. Such governmental laissez - faire policy is most efficient as there is no deadweight loss; maximum supply and demand are met across the world, as all parties willing to participate are allowed to satisfy either their profit or utility. This would indicate that all countries should agree to establish a free trade ecosystem on a global scale. It is important to note that free trade’s benefits are based on another economic theory, comparative advantage, which outlines that nations (as all economic agents) are better off by specialising in producing goods and services where they have the lowest opportunity costs, without requiring absolute advantage. Free trade, according to these theories, is beneficial to all.

However, it is important to note that David Ricardo’s theory of comparative advantage

only focuses on the aggregate gains from specialisation and trade, not how the benefits of

trade are distributed within or between societies; especially when trade is recurred over a

long period of time. Alternative trade theories, collectively called New Trade Theory, support trade restrictions, as free trade does not guarantee an equitable distribution of gains. Firstly, within the importer country, some local producers (and their employees) would benefit from protectionist policies as these would elevate their product’s final price. The government might yield to the pressure of such internal subgroups to the detriment of internal consumers (and foreign producers) in the event of social inequalities or to prevent future social structure erosion. Secondly, when trading, all countries do not benefit equally. Those with the higher terms of trade (that is, the ratio of the price of a country’s exports to its imports) will benefit most to the expense of those with lower terms of trade and the more countries continue to trade the wider the inequality gap. We can see, therefore, that free trade, however efficient, does not come without any consequences for subgroups within all populations, presenting even greater issues for those countries offering lower value products and services on the international market.

So, it is then possible to conclude that free trade generates overall benefits, but, in

any case, governments will be responsible for either redistributing the gains achieved from

trade or placing barriers to manage income inequalities as if they are sustained over time

within a population it leads to discontent, disputes and possibly social unrest.

Free trade also leads to interdependence across countries. Under free trade, nations

choose to specialise in certain goods and services, purchasing the rest of goods from others.

This interdependence relies heavily on trust and the assumption that the trading partners will always want to sell strategic goods and services. What could happen to sectors such as food and water, energy production, the quaternary sector or defence under pure free trade if

dependent on a rogue trade partner? Could a country become vulnerable to geopolitical

tactics from trading partners who hold dominance over those strategic sectors?

For certain sectors, even if in the short term it could make sense to have free trade

conditions, some protectionism allows a responsible government to prioritise national

interests while investment makes the sector relatively more productive or accepts a higher

price to retain some autonomy. Protectionist policies then become useful, as they protect

national industries by reducing competition from foreign imports. They might seem appealing in a situation where trust between countries is damaged, thus, making it best to protect national interests rather than gamble away a country’s ability to function.

So then, why would countries still choose to place protectionist policies instead of

achieving a world in which free trade is the norm? Responsible governments are

characterised by tending to the people’s needs, focusing on a nation’s development and on

its interactions with other countries and finally on protecting the country itself from predatory intentions portrayed by other nations. In a perfect conflict free world, free trade would be easier to implement and maintain. However, in the face of possible conflicts of interest between nations, it makes sense to apply protectionist policies. Essentially, countries have a choice to either accept or reject free trade.

Depending on the circumstances of each country, you may end up with different interests at

different times, which may lead to a selective approach to what suits a nation best in certain

situations. This can lead to a combination of free trade and protectionism, not necessarily

neglecting one for the other, but combining both and reaching an equilibrium in which the

country as a whole ends up benefitting.

Protectionism ultimately reduces trade between countries, which lessens the overall

production possibilities. Yet it exists because governments must balance economic efficiency with security, stability, inequality, and strategic interests. By Jaime B, Year 12