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its said that "there is all-but-universal agreement that the adoption of restrictive trade policies was destructive and counterproductive and that similarly succumbing to protectionism in our current slump should be avoided at all cost."

However, doesn't that depend on your net exports? so if more is leaking from your economy, than is being injected, protectionism is a good strategy, right?

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  • $\begingroup$ Protectionism prevents countries from utilizing the 'gains from trade' that stem from 'comparative advantage' - read up on those 2 terms and that will give you a lot of insight. $\endgroup$ – VCG Aug 29 '16 at 0:48
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Voluntary trade is inherently beneficial to both parties. The fact that it is voluntary means that there is never a circumstance where one side ends up worse off overall as a result of the trade, if they did then they would choose not to trade in the first place. The reason trade can be beneficial to both sides is due to comparative advantage.

Thus, trade by its very definition creates an overall societal benefit when it occurs, and protectionism, which is simply preventing trade, removes that societal benefit and is inherently bad for society as a whole.

Trade can however create winners and losers, if the USA is very efficient at producing Corn and Japan is very efficient at producing electronics you can trade those goods (using money as an intermediary). Because the US market is now flooded with cheap electronics, electronic manufacturers in the US are going to go out of business, and vice-versa for corn producers in Japan. In the short term, lobbyists from the electronic manufacturers may demand a ban on trade with Japan or high tariffs to protect the U.S electronic manufacturers. Politicians who don't understand economics may cede to those demands and enforce tariffs which overall decrease social utility.

In the long term however capital and labor from the electronics sector in the U.S will shift over to the corn producing sector creating more social benefit than there was before. It is part of the governments jobs to make this period as fast as possible by providing re-education and funding to shift labor and capital into the corn market.

There are two exceptions to this rule:

  1. To protect infant industries tariffs may be useful in allowing the infrastructure and technology to develop to a point where a local industry can compete internationally but these tariffs should be temporary and extremely limited.

  2. In the case of dumping, where a company subsidizes their exports to the point where they are artificially cheap in order to drive out international competitors before raising the price to monopolistic levels a tariff may be useful in preventing the dumping from allowing one nation to monopolize an industry. While this is rare, an example of it might be OPEC nations intentionally overproducing to drop the price of oil in order to drive out American oil producers in the fracking industry.

In both of these cases in the short term the tariff still has lowered overall societal benefit from trade but in the long term may have fostered a situation which is better for the country either by allowing an industry to become efficient and competitive, or preventing a monopolist situation.

In most cases however, free trade is the ideal state and maximizes social utility by ensuring that each individual country will produce the goods best suited to their workforce and capital, and lowering the price of goods produced for every country overall increasing total global production, and thus societal benefit. The great depression is an excellent example of where protectionism ruined an economy through tariffs such as the Hawley-Smoot Tariff.

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  • $\begingroup$ Externalities and other market failures can make trade socially harmful but privately beneficial. They can, for example in the presence of economies of scale, also make trade restrictions even more socially harmful than in simpler settings. $\endgroup$ – BKay Aug 30 '16 at 13:12
  • $\begingroup$ I agree in general that externalizes can prevent free markets from being efficient but can't think of any examples where trade would have externalities after the product is produced already. Maybe pollution from the means of transportation or something. In general I think externalities aren't particularly important in this context. $\endgroup$ – TheSaint321 Feb 15 '17 at 20:11
  • $\begingroup$ An example of this is called "exporting pollution". Rich countries typically have environmental laws that arguably internalize the pollution externalizes of manufacturing. If another country lacks such a law then eliminating trade barriers leads to the outsourcing of production, significant trade, and an socially inefficient level of production because of the production externalities. This has led some economists to propose a boarder adjustment tax accompany a domestic carbon tax. $\endgroup$ – BKay Feb 15 '17 at 20:19
  • $\begingroup$ Ah that's definitely a good point. I'm not sure if I'd classify that as an externality of trade or an externality of the production of the good itself but I suppose its a semantic point at best. $\endgroup$ – TheSaint321 Feb 15 '17 at 20:21
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Net exports aren't in and of themselves a bad thing; they should just be a transitory phenomenon. A prolonged export imbalance should just lead to an exchange rate adjustment which fixes the imbalance.

Protectionism on the whole, in general, leaves all sides worse off. David Ricardo documented it very well; and it wouldn't surprise me if there were proverbs in all the major ancient civilisations to the same effect.

There are exceptions: for example, infant industries typically need protection during their vulnerable early years, so that they can reach sufficient maturity that they can thrive under international competition.

However, that's different to the general protectionism that does get proposed at times of deep slump - the Long Depression, the Great Depression, and the current (2008-now) slump: then, it's one of the (socially and economically) worst options, but does appeal to the masses when they're desperate for an "other" to blame, and for easy answers to complex questions.

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