Question

International Trade (10)

Economists are nearly unanimous in their support of free trade yet governments often use tariffs and quotas to interfere with free trade. According to the textbook, what explains the difference? Who is correct, the economists or the government, and why?

Answer 1

As far as the criteria is efficiency, economists all over the world faver free trade because of the gains from trade that the trading nations receive as a result of free trade. It is true that some industries or sectors are hurt in terms of reduced sales, wages and returns. But they are are more than compensated by other industries where trade increases the relative prices wages and returns. Jobs are lost in some sector but they are increased in others which compensates for the loss. Overall free trade between nations increased their national welfare.

Government however are politically motivated and they are often supported by lobbyists who are always in favour of trade protection. This is because they are more concerned about their own welfare. Government is also concerned about the revenue it receives from trade barriers. Government is not correct if the criteria is efficiency because trade protection will reduce competition in the domestic market and encourage domestic firms to remain incompetent and cost inefficient.