We have seen that international trade produces mutual benefits to the countries that engage in it. We have also seen that tariffs and import quotas, although they produce winners as well as losers, reduce total surplus. Yet many countries continue to impose tariffs and import quotas as well as to enact other protectionist measures.

To understand why trade protection takes place, we will first look at some common justifications for protection. Then we will look at the politics of trade protection. Finally, we will look at an important feature of trade protection in today’s world: tariffs and import quotas are the subject of international negotiation and are policed by international organizations.

Advocates for tariffs and import quotas offer a variety of arguments. Three common arguments are national security, job creation, and the infant industry argument.

The national security argument is based on the proposition that overseas sources of goods are vulnerable to disruption in times of international conflict; therefore, a country should protect domestic suppliers of crucial goods, with the aim to be self-sufficient in those goods. In the 1960s, the United States—which had begun to import oil as domestic oil reserves ran low—had an import quota on oil, justified on national security grounds. Currently, Canada imposes import restrictions on agricultural products to protect Canadian farmers, ensure a stable domestic supply of food, and prevent price fluctuations.

The job creation argument points to the additional jobs created in import-competing industries as a result of trade protection.² Economists argue that these jobs are offset by the jobs lost elsewhere, such as industries that use imported inputs and now face higher input costs. But non-economists don’t always find this argument persuasive.

Finally, the infant industry argument, often raised in newly industrializing countries, holds that new industries require a temporary period of trade protection to get established. For example, in the 1950s many countries in Latin America imposed tariffs and import quotas on manufactured goods, in an effort to switch from their traditional role as exporters of raw materials to a new status as industrial countries.

In theory, the argument for infant industry protection can be compelling, particularly in high-tech industries that increase a country’s overall skill level. Reality, however, is more complicated: it is most often industries that are politically influential that gain protection. In addition, governments tend to be poor predictors of the best emerging technologies. Finally, it is often very difficult to wean an industry from protection when it should be mature enough to stand on its own.

In reality, much trade protection has little to do with the arguments just described. Instead, it reflects the political influence of import-competing producers.

We’ve seen that a tariff or import quota leads to gains for import-competing producers and losses for consumers. Producers, however, usually have much more influence over trade policy decisions. The producers who compete with imports of a particular good are usually a smaller, more cohesive group than the consumers of that good.

An example is trade protection for eggs: Canada has a limit on how many eggs can be imported, which on average causes our domestic price to be higher than the world price, so Canadian families pay more for the eggs they consume. For example, according to the National Post, a carton of eggs cost about $3.19 in Vancouver but only $2.09 in Washington State in 2012 (the higher price was mostly caused by an import quota and supply management policies). This quota is difficult to rationalize in terms of any economic argument. However, consumers rarely complain about the quota because they are unaware that it exists. According to Agriculture and Agri-Food Canada, Canadian egg consumption was 16.1 dozen per person in 2009. At that rate, the average Canadian would pay about $18 more a year for eggs than an American with similar egg consumption would, a difference small enough to not attract notice. But, according to Egg Farmers of Canada, although there are only a few thousand egg farmers in Canada, the Canadian egg industry employs 16 800 people across the country and contributes $1.4 billion to Canada’s output. They are very aware of the benefits they receive from the quota and they make sure that their interest in the matter is heard in Parliament.

Given these political realities, it may seem surprising that trade is as free as it is. For example, Canada has low tariffs, and its import quotas are mainly confined to clothing and a few agricultural products. It would be nice to say that the main reason trade protection is so limited is that economists have convinced governments of the virtues of free trade. A more important reason, however, is the role of international trade agreements.

When a country engages in trade protection, it hurts two groups. We’ve already emphasized the adverse effect on domestic consumers, but protection also hurts foreign export industries. This means that countries care about one anothers’ trade policies: the Canadian lumber industry, for example, has a strong interest in keeping U.S. tariffs on forest products low.

Because countries care about one anothers’ trade policies, they enter into international trade agreements: treaties in which a country promises to engage in less trade protection against the exports of another country in return for a promise by the other country to do the same for its own exports. Most world trade is now governed by such agreements.

Some international trade agreements involve just two countries or a small group of countries. As we mentioned in the opening story, Canada, the United States, and Mexico are joined together by the North American Free Trade Agreement, or NAFTA. This agreement, signed in 1993, will eventually remove all barriers to trade among the three nations. In Europe, as of July 1, 2013, 28 nations are part of an even more comprehensive agreement, the European Union, or EU. In NAFTA, the member countries set their own tariff rates against imports from other non-member countries. The EU, however, is a customs union: tariffs are levied at the same rate on goods from outside the EU entering the union.

There are also global trade agreements covering most of the world. Such global agreements are overseen by the World Trade Organization, or WTO, an international organization composed of 151 member countries, accounting for the bulk of world trade. The WTO plays two roles. First, it provides the framework for the massively complex negotiations involved in a major international trade agreement (the full text of the last major agreement, approved in 1994, was 24 000 pages long). Second, the WTO resolves disputes between its members. These disputes typically arise when one country claims that another country’s policies violate its previous agreements.

The WTO is sometimes, with great exaggeration, described as a world government. In fact, it has no army, no police, and no direct enforcement power. The grain of truth in that description is that when a country joins the WTO, it agrees to accept the organization’s judgments—and these judgments apply not only to tariffs and import quotas but also to domestic policies that the organization considers trade protection disguised under another name. So in joining the WTO a country does give up some of its sovereignty.

Trade disputes among countries usually take a long time to get resolved. By the time a settlement or a resolution has been reached, a significant amount of costs or hardships may have been incurred. As seen in the For Inquiring Minds on the next page, countries may not follow the intent of the agreements. Having an agreement and abiding by that agreement are not necessarily the same thing.

The forward march of globalization over the past century is generally considered a major political and economic success. Economists and policy-makers alike have viewed growing world trade, in particular, as a good thing. We would be remiss, however, if we failed to acknowledge that many people are having second thoughts about globalization. To a large extent, these second thoughts reflect two concerns shared by many economists: worries about the effects of globalization on inequality and worries that new developments, in particular the growth in offshore outsourcing, are increasing economic insecurity.

Globalization and Inequality We’ve already mentioned the implications of international trade for factor prices, such as wages: when wealthy countries like Canada export skill-intensive products like aircraft while importing labour-intensive products like clothing, they can expect to see the wage gap between more educated and less educated domestic workers widen. Thirty years ago, this wasn’t a significant concern, because most of the goods wealthy countries imported from poorer countries were raw materials or goods where comparative advantage depended on climate. Today, however, many manufactured goods are imported from relatively poor countries, with a potentially much larger effect on the distribution of income.

Trade with China, in particular, raises concerns among labour groups trying to maintain wage levels in rich countries. Although China has experienced spectacular economic growth since the economic reforms that began in the late 1970s, it remains a relatively poor, low-wage country. In 2012, wages of Chinese manufacturing workers were only about 14% of their Canadian counterparts’ wages. Meanwhile, imports from China have soared. In 1992, only 1.67% of Canada’s imports came from China; by 2012, the figure had risen to 11%. There’s not much question that these surging imports from China put at least some downward pressure on the wages of less educated Canadian workers.

Outsourcing Chinese exports to Canada overwhelmingly consist of labour-intensive manufactured goods. However, some Canadian workers have recently found themselves facing a new form of international competition. Outsourcing, in which a company hires another company to perform some task, such as running the corporate computer system, is a long-standing business practice. Until recently, however, outsourcing was normally done locally, with a company hiring another company in the same city or country.

Now, modern telecommunications increasingly makes it possible to engage in offshore outsourcing, in which businesses hire people in another country to perform various tasks. The classic example is call centres: the person answering the phone when you call a company’s 1-800 help line may well be in India, which has taken the lead in attracting offshore outsourcing. Offshore outsourcing has also spread to fields such as software design/programming and the financial sector. In April 2013, the Royal Bank of Canada (RBC) came under fire when the public found out the bank had outsourced 45 of its information technology (IT) jobs to foreign workers. Although the number of positions being outsourced seems small, it was sufficient to cause concerns among Canadians. According to International Data Corporation (IDC) Canada, this recent outsourcing of 45 IT jobs by RBC is just the tip of an iceberg. An IDC Canada survey found that 6 out of 10 Canadian firms would use outsourcing as a means to cut costs. It is not surprising then that some economists have warned that millions or even tens of millions of North American workers who have never thought they could face foreign competition for their jobs may face unpleasant surprises in the not-too-distant future.

Concerns about income distribution and outsourcing, as we’ve said, are shared by many economists. There is also, however, widespread opposition to globalization. In 1999, an attempt to start a major round of trade negotiations failed in part because the WTO meeting, in Seattle, was disrupted by antiglobalization demonstrators. However, the more important reason for its failure was disagreement among the countries represented. Another round of negotiations that began in 2001 in Doha, Qatar, known as the “Doha development round,” stalled in 2008, mainly because of disagreements over agricultural trade rules. No significant progress has been made since then.

What motivates the antiglobalization movement? To some extent it’s the sweatshop labour fallacy: it’s easy to get outraged about the low wages paid to the person who made your shirt, and harder to appreciate how much worse off that person would be if denied the opportunity to sell goods in rich countries’ markets. It’s also true, however, that the movement represents a backlash against supporters of globalization who have oversold its benefits. Countries in Latin America, in particular, were promised that reducing their tariff rates would produce an economic takeoff; instead, they have experienced disappointing results. Some groups, such as poor farmers facing new competition from imported food, ended up worse off.

Do these new challenges to globalization undermine the argument that international trade is a good thing? The great majority of economists would argue that the gains from reducing trade protection still exceed the losses. However, it has become more important than before to make sure that the gains from international trade are widely spread. And the politics of international trade is becoming increasingly difficult as the extent of trade has grown.