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A (Very) Short Primer on Trade and Protectionism

In my latest column for AIER I offer a short primer – it’s just over 1,100 words – on international trade and that nest of fallacies known as “protectionism.” A slice:

– To the extent that tariffs succeed in protecting jobs in some domestic firms, they destroy jobs elsewhere in the domestic economy.

Insofar as tariffs enable some domestic producers to raise the prices they charge – and, thus, prompt these protected firms to produce more output than they would produce absent the tariffs – consumers have less money to spend on other goods and services. Demand for other domestically produced goods and services is artificially lowered by the same tariffs that artificially raise demand for the output of protected firms. While output and employment in protected firms rise, output and employment elsewhere in the domestic economy fall.

Tariffs do not increase total domestic employment over the long run, and nor do tariffs decrease this employment. Tariffs shift employment. Tariffs shift employment away from unprotected industries to protected ones.

– In the absence of any home-country trade restrictions, workers and other domestic resources would tend to be employed in ways that produce the most value.

This happy outcome is ensured by competition. Workers employed to produce domestically what can be imported at lower costs are workers employed inefficiently. With free trade, these workers would lose their jobs. They would eventually find employment producing outputs that are produced most efficiently in the home country.

– Tariffs, therefore, by protecting workers employed inefficiently from losing their jobs, cause workers and other resources to be employed less productively than otherwise.

Because over the long run wage rates are determined by worker productivity, protectionism – by keeping workers in less-productive employments – keeps real wages lower than wages would otherwise be.