Free Trade Versus Protectionism

“Free trade should not mean free labor.” - Stephen F. Lynch

In the 1990s, you would have been hard-pressed to find an economist who was not in favor of Free trade and the merits of economic openness.  In fact some of the major free trade agreements we have in existence were signed and came into effect during this period, including the North American Free Trade Agreement (NAFTA), the Commonwealth of Independent States (CIS), and the Pan Arab Free Trade Area (PAFTA). However, following Brexit (The referendum whereby British Citizens voted to exit the European Union) we have observed a resurgence in Protectionism rhetoric, whereby countries resolve to protect their domestic industries by raising tariffs and reducing imports.  This has been highlighted during this year’s American Elections with the Wall Street Journal quoting both candidates as stating the following

“I will stop any trade deal that kills jobs or holds down wages—including the Trans-Pacific Partnership. I oppose it now, I’ll oppose it after the election, and I’ll oppose it as president.” —Hillary Clinton: Speech in Warren, Mich., Aug. 11

“We have surrendered our middle class to the whims of foreign countries. We take care of them better than we take care of ourselves.” —Donald Trump: Speech in New York, Sept. 13

All the same Free trade versus Protectionism isn’t a new or a modern debate; it can actually be traced back to the era of the classical economic school of thought of the 18th and 19th centuries and even further back to the European Mercantile System of the 16th century.  Before it was referred to as “Free Trade” it was referred to as “unregulated foreign trade” by Adam smith who happened to be a proponent of it. In his book the Wealth of Nations, he examined the mercantilist doctrine that argued for the necessity of government regulation of foreign trade.  The mercantilist position was that exports should be higher than imports in order to achieve a “favorable trade balance.”  Shipping was crucial during the mercantile period as growth in the new colonies meant that primary advantage of foreign trade was assumed to be importing Gold and Silver. It has been argued that protectionism was prolific in the Mercantilism era due the fact that military conflict was both more common and more widespread than any other time in history.  

The case for free trade can be best explained through the distinction between absolute advantage and comparative advantage, where the first refers to the ability to produce more or better goods and services than somebody else and the latter refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume.  "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. " (The Wealth of Nations; Book IV, Section ii, 12)

In addition to Adam Smith, David Ricardo wrote extensively on the theory of comparative advantage. Using England and Portugal as examples, the Ricardian model took the intuitive explanation of comparative advantage that stated specialization good in each nation should be the good the nation has a comparative advantage in producing and presented it numerically. Moreover, Ricardo demonstrated how specialized labor reduced costs and as result increased returns.

Back to the Present Day

Despite, the anti-free trade populist national movements of its biggest trading partner and neighbor, Canada, and more specifically the Trudeau government, have remained ambitious in their pursuit of free trade.  As a matter of fact, on October 30, 2016 the Prime minister traveled to Brussels to sign Canada’s biggest bilateral initiative since NAFTA, the Comprehensive Economic and Trade Agreement (CETA) between Canada and European Union. This means that a huge market has been opened for Canadian Companies and more importantly it should answer critics who have been speculating over whether or not free trade was over.

“That leadership that we were able to show between Canada and Europe is not just something that will reassure our own citizens but should be an example to the world of how we can move forward on trade deals that do genuinely benefit everyone,” (Trudeau, The Canadian Press)

Furthermore, despite the conflicts of economic interests and human rights issues Canada and China are in the exploratory phase of a free trade agreement between the two countries.

By,

Kaha Haji-Mohamed

Works Cited

Picture titled, "Brussels, Belgium: European Parliament in Brussels", taken by alex.ch on July 30, 2006, obtained through Creative Commons (https://flic.kr/p/oaKY2)