The case for free trade ever since its conception has been made in multiple ways, be it through the classical economic reasoning of Smith and Ricardo’s absolute and comparative advantage or through satires by the astute French defender of freedom, Frédéric Bastiat. Modern economists demonstrate it with the help of mutually beneficial exchange.
However, the trend of economic thinking and policies in both developed and developing economies has been turning away from free trade for quite some time now. Protectionists and academics cite the job losses of workers and closing down of big factories whereby the political act of supporting free trade is construed as detrimental to the common good. Oxfam, one of the biggest liberal think tanks, recently reported that “The poorest people in developing countries often bear the brunt of FTAs, as seen in the case of Mexico and the North America Free Trade Agreement (NAFTA). In the first ten years after the agreement was enacted, Mexico lost 1.3 million agricultural jobs, according to the report.”
It is an unflinching truth that any exchange makes both parties better off, as trade takes place only when the buyer values the money he is willing to spend less than the good he is receiving and vice versa. Unfortunately, such an analysis cannot be extended to two nations trading with each other. Not because it is false that international trade makes individuals from the respective countries better off but because when trade protectionists and academics argue for tariffs, quotas, or duties, they are arguing not in terms of individuals being better or worse off but in terms of the collective as a whole. Therefore the argument against protectionist claims of import substitution, claims such as “Make America great again” or ”Self-reliant India” has to be in terms of the collective being better off.
That free trade makes everyone better off is one of the most agreed-upon arguments among economists and policymakers. But, free trade doesn’t immediately make everyone better off. Nor does it even make everyone better off. Unfettered trade makes the market more efficient which hurts inefficient market participants in the process. One of the most frequent claims protectionists make against free trade is the closure of factories across multiple states due to competition from Chinese laborers. But such treatment of free trade is inconsistent with the entire changes that unfettered trade brings about in an economy. The shutting down of American factories is no different than the shutting down of firms due to better and more efficient domestic market competition which provides the optimum allocation of resources while routing out inefficient elements.
The result of inefficient firms or factories closing down is not only inevitable but also a necessary step if one is to receive the juiciest fruits that free trade offers. Therefore, not only should one not refute this claim but rather give reasons why it must be allowed to take place. In a market economy, free trade essentially boils down to increased competition. Thus the argument which we ought to make is whether increased competition makes the collective better off as opposed to the effects of decreased competition due to barriers from free trade. And yes, it does.
Competition is the driving force of the market. In a competitive environment, entrepreneurs face profit-and-loss incentives, gaining profits when they correctly anticipate future market conditions, but suffering losses when their plans fail. The market process subjects entrepreneurs to an unrelenting discipline because any profit-seeking innovator in this environment faces the pressure of arbitrage in opportunities for better serving the consumer and better employment of resources. The greater the competition, the more intense this discipline becomes, and the more efficient the outcomes are.
All profitable production results from good ideas, inspired by the drive to grasp profit opportunities. Greater competition in the market allows for greater dissemination of these profitable ideas which in turn result in more efficient allocation of resources in the economy. This allows for better technological developments and investments which create more efficient jobs while providing better products to the consumer at lower prices. This is one of the reasons why despite various trade restrictions, the U.S. has created a high and sustainable job creation rate over the years in the presence of some free trading with other nations.
Entrepreneurship which drives the market process is not a natural resource that is found in countries but an element that emerges from a complex combination of a creative and a free society that safeguards private property and allows for competition to take place. The case against free trade in the form of protectionism leads us towards a stagnant society devoid of free ideas, devoid of consumer sovereignty, and devoid of a better future because it aims to restrict the role of competition and entrepreneurship in the economy.
Vibhu Vikramaditya is an economics and a libertarian scholar with research interests in capital theory, monetary theory, and business cycles. He writes on modern events in the economy from a legal and economic standpoint.
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