Question

International trade theory implies that international trade benefits all trading countries. However, empirical observation confirms widespread restrictions to international trade flows imposed officially by countries. How might these two facts be reconciled? Discuss.

Answer 1

To reconcile these two facts, we may take a very simple concept:

In Economics, be it for one country or many countries, there always exist a variety of trade-offs. One such important trade-off is that between efficiency and equality.

Here, efficiency arises in a state of free trade - here the most efficient country will dominate. It will produce at a cost of production that no other country can replicate. As such, it is a win-win situation. Take the case of China, which is considered to be one of the most efficient countries. If costs of production, including opportunity costs, were the only benchmark, every country in the world should have allowed China to produce everything. In theory, this would benefit everyone.

But, that is not the case. Countries also would like to promote equality within their borders. So if USA wants their domestic manufacturers to succeed, they will deliberately impose certain restrictions on the products from China.

Trade may make everyone better off, but there are times when government intervention is required.

Now, China may not like this. They may consider it as anti-competitive, or against the spirit of free trade. But will China allow the same freedom to others?

Therefore, as mentioned earlier, most countries try to balance between how much they would like to import from others, and how much they would like to produce themselves.

Some major reasons why countries restrict international trade, are as under:

• to protect their vulnerable industries
• to keep their national defense production secretive
• to generate opportunities for employment and production domestically
• to protect their domestic environment

While there will be numerous examples of such policies, we can very well see from the above mentioned reasons that it is not always a question of right vs. wrong. Sometimes, it is just necessary.

So if coming back to the trade-off, any wise country would keep certain activities to itself. These would cover most of the reasons mentioned above. For everything else that doesn't critically fit the list above, there is always the prospect of importing from others.

We may not allow China to enter our defense industry, but we may allow some imports in toys and electronic items. So to reconcile the two facts, there is no doubt that free trade increases efficiency of the economic transactions. But sometimes, equality and protection are also necessary. Hence, we won't come across a single country that has opened up its trade completely.