Arguments Against Free Trade

We have seen the benefits of trade, and have looked at how trade undoubtedly benefits some and harms others. Those who are harmed by trade often seek to restrict trade, primarily in the form of tariffs and quotas. Because trade leads to some loss, those who are harmed by trade have made arguments against free trade.

The arguments against free trade fall into two camps. Traditional economic arguments include protection for infant industries, protection against dumping, low foreign wages, and support for industries judged vital for national defense. More recent arguments focus on globalization (social and economic) concerns that embody political-economy characteristics. These include domestic employment concerns, environmental concerns, and the impact of globalization on working conditions in developing nations. In what follows, we take a critical look at each of these arguments, showing that most of these arguments do not have a solid empirical basis.

Traditional Economic Arguments

Arguments against trade are not new. Despite the huge gains from trade, distortions (subsidies and trade barriers) continue because changing current policies will hurt those dependent on subsidies and trade restrictions, and these firms and workers will show their displeasure in the voting booth. All of these traditional economic arguments against free trade seem reasonable on their face, but on closer examination, they look less attractive.

Infant Industry Argument An infant industry, it is argued, is one that is too underdeveloped to achieve comparative advantage or perhaps even to survive in the global market. Such an industry may be too small or undercapitalized, or its management and workers may be too inexperienced, to compete. Unless the industry’s government provides it with some protection through tariffs, quotas, or subsidies, it might not survive in the face of foreign competition.

In theory, once the infant industry has been given this protection, it should be able to grow, acquiring the necessary capital and expertise needed to compete internationally. Germany and the United States used high tariffs to protect their infant manufacturing sectors in the 1800s, and Japan continued to maintain import restrictions up until the 1970s.

Although the infant industry argument sounds reasonable, it has several limitations. First, protecting an industry must be done in a way that makes the industry internationally competitive. Many countries coddle their firms, and these producers never seem to develop into “mature,” internationally viable firms. Once protection is provided (typically a protective tariff), it is difficult to remove after an industry has matured. The industry and its workers continue to convince policymakers of the need for continued protection.

Second, infant industry protection often tends to focus on capital manufacturing. Countries with huge labor supplies would do better to develop their labor-intensive industries first, letting more capital-intensive industries develop over time. Every country, after all, should seek to exploit its comparative advantages, but it is difficult to determine which industries have a chance of developing a comparative advantage in the future and should be temporarily protected.

Third, many industries seem to be able to develop without protections, therefore countries may be wasting their resources and reducing their incomes by imposing protection measures.

Clearly, the infant industry argument is not valid for advanced economies such as those of the United States, much of Europe, and Japan. The evidence for developing nations shows some benefits but is mixed for the reasons noted above.

Antidumping Dumping means that goods are sold at lower prices (often below cost) abroad than in their home market. This is typically a result of government subsidies.

In the same way that price discrimination improves profits, firms can price discriminate between their home markets and foreign markets. Let’s assume that costs of production are $100 per unit for all firms (domestic and foreign). A state subsidy of $30 a unit, for example, reduces domestic costs to $70 per unit and permits the firm to sell its product in world markets at these lower prices. These state subsidies give these firms a cost advantage in foreign markets.

Firms can use dumping as a form of predatory pricing, using higher prices in their domestic markets to support unrealistically low prices in foreign markets. The goal of predatory pricing is to drive foreign competitors out of business. When this occurs, the firm doing the dumping then comes back and imposes higher prices. In the long run, these higher prices thereby offset the company’s short-term losses.

Dumping violates American trade laws. If the federal government determines that a foreign firm is dumping products onto the American market, it can impose antidumping tariffs on the offending products. The government, however, must distinguish among dumping, legitimate price discrimination, and legitimate instances of lower cost production arising from comparative advantage.

Low Foreign Wages Some advocates of trade barriers maintain that domestic firms and their workers need to be protected from displacement by cheap foreign labor. Without this protection, it is argued, foreign manufacturers that pay their workers pennies an hour will flood the market with low-cost products. As we have already seen, this argument has something to it: Workers in advanced economies can be displaced by low-wage foreign workers. This is what has happened in the American textile industry.

Once a handful of American clothing manufacturers began moving their production facilities overseas, thereby undercutting domestic producers, other manufacturers were forced to follow them. American consumers have benefited from lower clothing prices, but many displaced textile workers are still trying to get retrained and adapt to work in other industries. More recently, many manufacturing jobs have drifted overseas, and high-technology firms today are shifting some help desk facilities and computer programming to foreign shores.

On balance, however, the benefits of lower priced goods considerably exceed the costs of lost employment. The federal government has resisted imposing protection measures for the sake of protecting jobs, instead funding programs that help displaced workers transition to new lines of work.

National Defense Argument In times of national crisis or war, the United States must be able to rely on key domestic industries, such as oil, steel, and defense. Some have argued that these industries may require some protection even during peacetime to ensure that they are already well established when a crisis strikes and importing key products may be impossible. Within limits, this argument is sound. Still, the United States has the capacity to produce such a wide variety of products that protections for specific industries would seem to be unjustified and unnecessary.

So what are we to make of these traditional arguments? Although they all seem reasonable, they all have deficiencies. Infant industries may be helped in the short run, but protections are often extended well beyond what is necessary, resulting in inefficient firms that are vulnerable on world markets. Dumping is clearly a potential problem, but distinguishing real cases of dumping and comparative advantage has often proven difficult in practice. Low foreign wages are often the only comparative advantage a developing nation has to offer the world economy, and typically, the benefits to consumers vastly outweigh the loss to a particular industry. Maintaining (protecting) industries for national defense has merit and may be appropriate for some countries, but for a country as huge and diversified as the United States, it is probably unnecessary.

Recent Globalization Concerns

Expanded trade and globalization have provided the world’s producers and consumers with many benefits. Some observers, however, have voiced concerns about globalization and its effects on domestic employment, the global environment, and working conditions in developing nations. Let’s look at each one of these globalization concerns.

Trade and Domestic Employment Some critics argue that increased trade and globalization spell job losses for domestic workers. We have seen that this can be true. Some firms, unable to compete with imports, will be forced to lay off workers or even close their doors. Even so, increased trade usually allows firms that are exporters to expand their operations and hire new workers. These will be firms in industries with comparative advantages. For the United States, these industries tend to be those that require a highly skilled workforce, resulting in higher wages for American workers.

Clearly, those industries that are adding workers and those that are losing jobs are different industries. For workers who lose their jobs, switching industries can be difficult and time-consuming, and often it requires new investments in human capital. American trade policy recognizes this problem, and the Trade Adjustment Assistance (TAA) program provides workers with job search assistance, job training, and some relocation allowances. In some industries sensitive to trade liberalization, including textiles and agriculture, trade policies are designed to proceed gradually, thus giving these industries and their workers some extra time to adjust.

Possible employment losses in some noncompetitive industries do not seem to provide enough justification for restricting trade. By imposing trade restrictions such as tariffs or quotas in one industry, employment opportunities in many other industries may be reduced. Open, competitive trade encourages producers to focus their production on those areas in which the country stands at a comparative advantage. Free trade puts competitive pressure on domestic firms, forcing them to be more productive and competitive, boosting the flow of information and technology across borders, and widening the availability of inputs for producers. At the end of the day, consumers benefit from these efficiencies, having more goods to choose from and enjoying a higher standard of living.

Trade and the Environment Concerns about globalization, trade, and the environment usually take one of two forms. Some people are concerned that expanded trade and globalization will lead to increased environmental degradation as companies take advantage of lax environmental laws abroad, particularly in the developing world. Others worry that attempts by the government to strengthen environmental laws will be challenged by trading partners as disguised protectionism.

Domestic environmental regulations usually target a product or process that creates pollution or other environmental problems. One concern in establishing environmental regulations, however, is that they not unfairly discriminate against the products of another country. This is usually not a serious problem. Nearly all trade agreements, including the World Trade Organization Agreements and NAFTA, have provisions permitting countries to enforce measures “necessary to protect human, animal or plant life or health” or to conserve exhaustible natural resources. Nothing in our trade agreements prevents the United States from implementing environmental regulations as long as they do not unreasonably discriminate against our trading partners.

Will free trade come at the expense of the environment? Every action involves a tradeoff. Clearly, there can be cases in which the benefits of trade accruing to large numbers of people result in harm to a more concentrated group. However, trade policies can also be complementary to good environmental policies. For example, increased free trade in agriculture encourages countries with fertile lands to specialize in growing crops while discouraging countries from farming marginal lands that require the use of environmentally damaging pesticides and chemicals.

We have seen that trade raises incomes in developed and developing countries. And environmental protection is an income elastic good: As incomes rise, the demand for environmental protections rises and its environmental protection efforts begin to improve.

In poor, developing nations, environmental protection will not at first be a priority. Critics of globalization are concerned that because environmental and labor standards in many developing nations are well below those of the developed countries, there will be pressure to adopt these lower standards in rich nations due to trade and foreign direct investment. But as Bhagwati and Hudec argue, there has been no systematic “race to the bottom” and many corporations often have the highest environmental and labor standards in the developing world.1 Also, it is worth noting that over time, as incomes rise, environmental protection takes on added importance even in poorer nations. On balance, trade probably benefits the environment over the longer term, as incomes grow in developing nations and environmental protections take on greater importance.

Trade and Its Effect on Working Conditions in Developing Nations Some antiglobalization activists argue that trade between the United States and developing countries, where wages are low and working conditions are deplorable, exploits workers in these developing countries. Clearly, such trade does hurt American workers in low-wage, low-skilled occupations who cannot compete with the even lower wage workers overseas. But it is not clear that workers in developing countries would be helped if the United States were to cut off its trade with those countries that refuse to improve wages or working conditions.

Restricting trade with countries that do not raise wages to levels we think acceptable or bring working conditions up to our standards would probably do more harm than good. Low wages reflect, among other factors, small investments in human capital, low productivity, and meager living standards characteristic of developing nations. Blocking trade with these nations may deprive them of their key chance to grow and to improve in those areas in which we would like to see change.

Liberalized trade policies, economic freedom, and a legal system that respects property rights and foreign capital investment probably provide the best recipe for rapid development, economic growth, environmental protection, and improved wages and working conditions.

In summary, trade does result in job losses in some industries, but the gain for consumers and the competitive pressures that trade puts on domestic companies is beneficial to the economy as a whole. Trade raises incomes in developing nations, resulting in a growing demand for more environmentally friendly production processes. Trade is not the reason for low environmental standards in developing countries; they result from low incomes, low standards of living, and poor governmental policies. Trade brings about higher levels of income and ultimately better working conditions.