No Such Thing as a Free Lunch: Principles of Economics (Part 178)

Trade wars aren't started by countries appealing to respected, independent trade authorities. Rather, trade wars begin when one country decides to violate international trade rules to undercut another country's industries.

Ron Wyden

International Trade, Comparative Advantage, and Protectionism

(Part E)

by

Charles Lamson

The Case for Protection

It seems all pleas for protection share the same themes. This post describes the most frequently heard pleas.

Protection Saves Jobs The main argument for protection is that foreign competition costs Americans their jobs. When Americans buy Toyotas, U.S. cars go unsold. This leads to layoffs in the domestic auto industry. When Americans buy Japanese or German steel, steel workers in Pittsburgh lose their jobs. When Americans buy shoes or textiles from Korea or Taiwan, the mill workers in Maine and Massachusetts as well as in South Carolina and Georgia lose their jobs.

Some Countries Engage in Unfair Trade Practices Attempts by U.S. firms to monopolize an industry are illegal under the Sherman and Clayton Acts. If a strong company decides to drive the competition out of the market by setting prices below cost, it would be aggressively prosecuted by the Antitrust Division of the Justice Department. However, the argument goes, if we will not allow a U.S. firm to engage in predatory pricing or monopolize an industry or market, can we stand by and let a German firm or Japanese firm do so in the name of free trade? This is a legitimate argument and one that has gained significant favor in recent years. How would we respond when a large international company or a country behaves strategically against a domestic firm or industry? Free trade may be the best solution when everybody plays by the rules, but sometimes we have to fight back.

Cheap Foreign Labor Makes Competition Unfair Wages in a competitive economy reflect productivity. Workers in the United States earn higher wages because they are more productive. The United States has more capital per worker, and its workers are better trained. Trade flows not according to absolute advantage but according to comparative advantage: All countries benefit, even if one country is more efficient at producing everything.

Protection Safeguards National Security Beyond saving jobs, certain sectors of the economy may appeal for protection for other reasons. The steel industry has argued for years with some success that it is of vital importance to national defense. In the event of a war, the United States would not want to depend on foreign countries for products as vital as steel. Even if we acknowledge another country's comparative advantage, we may want to protect our own resources. 

Protection Discourages Dependency Closely related to the national defense argument is the claim that countries---particularly small or developing countries---may come to rely too heavily on one or more trading partners for many items. If a small country comes to rely on a major power for food or energy or some important raw material in which the large nation has a comparative advantage, it may be difficult for the smaller nation to remain politically neutral. Some critics of free trade argue that the superpowers have consciously engaged in trade with smaller countries to create these kinds of dependencies.

Protection Safeguards Infant Industries Young industries in a given country may have a difficult time competing with established industries in other countries. In a dynamic world, a protected infant industry might mature into a strong one worldwide because of an acquired, but real, comparative advantage. If such an industry is undercut and driven out of world markets at the beginning of its life, the comparative advantage might never develop.

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 680-683*

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