Question

Take the reasons for trade protection into account and discuss what free trade does to the economy.

When the first Japanese cars arrived on the West Coast in the 1970s, no one saw them as a threat to U.S. jobs. Although they were cheaper and more fuel-efficient than U.S.-made cars, most Americans could not be bothered; with gasoline at 30 cents a gallon, the difference in cost between a car that got 30 miles per gallon and one that got 10 was not very great, even for someone who drove a lot. But all this changed with the Arab oil embargo of 1973. As gas prices climbed, Americans took another look at small foreign cars. With expensive U.S. labor and outmoded facilities on one side, and Japanese efficiency and management techniques on the other, Japan seemed to be winning the war in the showroom. While imports may create as many jobs as they consume in the long run, in the short run many smokestack industry workers can be left permanently unemployed or underemployed.

Worried U.S. workers wanted protection, and they found a strong advocate in Representative John Dingell, one of the leaders of an emerging protectionist movement in Congress. Dingell spoke with President Reagan and Trade Representative William Brock and warned that if voluntary restrictions on Japanese auto imports weren't adopted, Congress would impose mandatory ones. Faced with this choice, the Japanese agreed in negotiations to voluntary restrictions. The restrictions worked. As the number of Japanese auto imports dropped between 1981 and 1982, domestic auto industry employment rose. But the cost of saving hundreds of thousands of U.S. jobs was restricted choice and higher prices for hundreds of millions of U.S. consumers. Hefty dealer markups were imposed on the scarcer but still-popular imports, and as sticker prices rose on Toyotas and Datsuns, General Motors, Ford, and Chrysler found that they could raise prices too.

The combined price paid by consumers for trade restrictions is very high; it has been estimated that each job protected from foreign competition with quotas or tariffs costs consumers about $160,000 in higher prices-more than enough to support the holder of that job. While trade restrictions may save jobs in the short run, they lock inefficiencies into the U.S. economy and merely delay needed efforts to divert people and assets into areas of the economy in which the United States has a competitive advantage-and which therefore offer long-term employment and profit possibilities.

Answer 1

Free trade, also called laissez-faire, a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports). A free-trade policy does not necessarily imply, however, that a country abandons all control and taxation of imports and exports. Due to free trade the division of labour among countries leads to specialization, greater efficiency, and higher aggregate production. From the point of view of a single country there may be practical advantages in trade restriction, particularly if the country is the main buyer or seller of a commodity. In practice, however, the protection of local industries may prove advantageous only to a small minority of the population, and it could be disadvantageous to the rest.