Is There Any Role for Protectionist Trade Policies?

Is There Any Role For Protectionist Trade Policies? - Economics Essay

Paul Krugman (1987) once declared that “if there was an Economist's Creed, it would surely contain the affirmations, "I believe in the Principle of Comparative Advantage," and "I believe in free trade." In theory, free trade is seen as a positive sum game that maximises world output and consumers’ choices, fosters peace and harmony among nations, and spurs domestic efficiency (Friedman, 1988). As its corollary, protectionism is regarded as a zero or negative sum game that should play no part in world affairs, a view strongly supported by the World Trade Organisation. Nevertheless, protectionist trade policies are still adopted in both highly developed countries like the USA and in developing countries like India. This phenomenon hints that there could be justification for protectionist trade policies, a view that is echoed by Corden’s (1974) declaration that “theory does not say that trade is best … it says that trade is best under certain conditions”. However, this essay will argue that while free trade may not be ideal, adopting protectionist trade policies can lead to more problems especially when interventionism goes astray. Hence, while free trade may not be optimal under all circumstances due to market imperfections, it is still a better rule of thumb to avoid protectionism in a world whose politics are as imperfect as markets.

Theoretical gains from free trade

First of all, it is important for us to establish what the theoretical gains from free trade are, and we will do so by taking a closer look at the principle of comparative advantage. According to Ricardo, a country has a comparative advantage in the production of a certain good or service when its opportunity cost of producing that particular good or service is lower than in other countries. Hence, if countries all concentrate their productive efforts in activities that they possess comparative advantages in and trade, the total world output of these goods and services will necessarily increase and all countries will become better off through trade as their consumption possibilities will be expanded. Furthermore, participating in international trade exposes domestic producers to more competitive pressure than faced internally, and this could lead