The Protectionism Delusion

Wednesday, January 16, 2008

Economists through years of study and practice have concluded that through free trade, based on the principal of comparative advantage, the world economy can achieve a more efficient allocation of resources and a higher level of material well-being. On the other hand, protectionism measures-barriers to free trade-lessen or eliminate gains from specialization. Trying to satisfy diverse wants, nations shift resources from efficient (low cost) to inefficient (high cost) uses. This is the reason why, instead of promoting competition, governments turn up to face monopolies that harm the economy and do not fulfill the consumers' needs.

Furthermore, the costs of protectionism are hidden because trade barriers are embedded in the prices of goods. Thus, either due to misunderstandings of the gains of trade or due to political considerations, governments may impose trade barriers, with consequences such as higher prices, which can not be realized by the public at the beginning.

No matter how compelling the logic for free trade, barriers do exist. Tariffs are excise taxes on imported goods. They may be imposed for purposes of revenue or protection. Protective tariffs are designed to shield domestic producers from foreign competition. Although they are usually not high enough to prohibit importation of foreign goods, they put foreign producers at a competitive disadvantage in selling in domestic markets. Import quotas specify the maximum amounts of commodities, which may be imported in any period. Thus, they can more effectively retard international commerce than tariffs. Non-tariff barriers (NTBs) refer to licensing requirements, unreasonable standards pertaining to product quality and safety, or unnecessary bureaucratic red tape in customs procedures. Great Britain bars importation of coal this way. Finally, voluntary export restrictions (VERs) are a trade barrier by which foreign firms "voluntarily" limit the amount of their exports to a particular country.