Protectionism: Economic Costs,
Economic analysis has long established free trade as a desirable economic policy. This conclusion has been reinforced by mounting empirical evidence on the benefits of trade, and yet protectionism is far from vanquished in the policy arena. Of course, this is nothing new: as Adam Smith observed more than two hundred years ago, “not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose” free trade.1 Indeed, interest groups opposed to free trade often have a political influence that is disproportionate to their economic size. This chapter describes the economic costs of trade restrictions and examines why, despite these costs, protectionism is often a seductive and politically attractive policy. The chapter concludes by considering instances in which trade protection might actually be beneficial.
In The Wealth of Nations, Adam Smith not only developed a powerful case for free trade, but he also issued a scathing attack on contemporary mercantilist policies that restricted trade. The ostensible purpose of these government policies was to promote national wealth, but Smith argued that such policies were ill-conceived and detracted from that objective. Smith observed that policymakers too frequently equated the interests of producers with the interests of the nation as a whole. Under mercantilism, almost any policy that helped existing producers expand output,
1 Smith 1976, 471.