In economics, free trade happens when buyers and sellers from different economies participate in voluntary transactions without government intervention. Otherwise known as “laissez-faire trade,” this concept allows for the importing (bringing in) and exporting (sending out) of goods and services.
Isolationism is the minimizing of trade – or even refusal to trade at all – with other counties. Protectionism is restricting or otherwise influencing trade to protect the producers of a country by limiting or hindering the imports of foreign goods and services. Both involve the use of government power to influence or control trade with other nations, and that’s called interventionism. Both isolationists and protectionists use some of the same tools. Tariffs are taxes on imports designed to limit them and generate tax revenue. Quotas are limits on how much of something can be imported. A subsidy is money given by the government – which, of course, means tax dollars collected from the people – to help a producer.
Free trade is the opposite of both protectionism and isolationism, and it eliminates the trade barriers erected by either other philosophy. However, bilateral (involving two parties) and multilateral (involving three or more parties) “free trade” agreements don’t entirely get rid of restrictions. Many deals do contain some interventionist measures. In fact, almost no modern trade agreement results in actual free trade.
In the early years, the United States depended on tariffs as a source of revenue to fund the government. Many of the taxes we have today didn’t exist then, and tariffs went as high as 95%. If a country wanted to either abolish a major tax or needed the money, the government could slap a tax on imports.
The more common reason governments introduce tariffs is to protect a local industry from foreign competition that is usually subsidized by that sector’s government. For instance, the Chinese government heavily supports steel, making it cheap for American companies to import. This interference affects US steel-producing companies because they cannot compete at these artificially low prices, weakening the domestic industry.
Should a company be protected from outside competition, it can grow its business at home and create more jobs – which can improve workers’ lives.
Higher prices are one of the most significant consequences of imposing tariffs. Because the importer is the one paying the tax, not the targeted government, the cost of goods or services goes up as tariffs go up. The price increase can affect low- and middle-income consumers’ purchasing power, which can then lead to diminishing sales.
If a company is shielded from competition and is the beneficiary of protectionism, then it can raise prices. However, the issue of supply and demand becomes an important factor because higher prices reduce demand, causing the company to slash prices. This is what is happening with US steel.
The main problem that comes after tariffs is a trade dispute. As one nation applies tariffs on another, the other country retaliates by applying tariffs of their own. As the trade dispute gets worse, each nation adds more tariffs against the other. Moreover, a country could import less, hurting industries that rely heavily on exports. For example, Chinese imports of US soybean have plunged in the trade spat between the United States and China, destroying the American industry in the process.
Free Trade or Protectionism
Adam Smith wrote in The Wealth of Nations: “In every country, it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.”
This would have been an accepted principle years ago. However, as more Americans witness jobs being outsourced and experience companies shifting operations overseas, recent studies have found that free trade is incrementally being disputed by folks of all political stripes.
Is this a positive trend for the United States? You decide.