The Case for Free Trade

As mentioned earlier, free trade results in lower costs for consumers, as well as expanded job opportunities in industries in which an economy has comparative advantage. In addition, there is a wider availability of goods, enhanced economic development for less developed nations, and other benefits.

A good way to demonstrate the benefits of having lower priced goods and expanded job opportunities is to compare a situation before and after the imposition of trade barriers. Figure 20.4 (32.4) illustrates the market for textiles in a country.

In this figure, the demand curve illustrates the demand for textiles in the country and the supply curve shows the supply from domestic producers. As you can see, the equilibrium price in this economy without trade is $4.20 and 450 million yards are produced. If the world price is $2 and free trade occurs, the price of textiles in the country will fall to $2 and consumers will purchase 700 million yards. Thus, textile consumers are much better off because the price is much lower and they can purchase more textiles (and other goods) as a result.

Domestic producers, however, are probably not pleased. Domestic production has fallen from 450 million to 200 million yards. As a result, producers are likely to press policy-makers for protection from foreign competition. If they succeed and a $1 per yard tariff is enacted, the situation will be as depicted in panel b of the figure above.

As a result of the tariff, the price of textiles increases for consumers and they buy fewer textiles. Although domestic production has increased somewhat (from 200 to 300 million yards), the losses to consumers are greater than the gains to producers. There is a net loss to the economy. In addition, there is a waste of resources associated with the tariffs. Some less efficient textile producers are able to operate under the tariff, whereas these producers would not be able to compete under free trade. The resources of these producers could be more efficiently employed in other activities. The existence of the tariff, however, enables these less efficient producers to operate.

• The Case for Protection