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11.6 Free Trade as the “Pragmatically Optimal” Policy Choice

Learning Objective

  1. Understand the modern argument for free trade as a “pragmatically optimal” policy choice.

In summary, the economic argument in support of free trade is a sophisticated argument that is based on the interpretation of results from the full collection of trade theories developed over the past two or three centuries. These theories, taken as a group, do not show that free trade is the best policy for every individual in all situations. Instead, the theories show that there are valid arguments supporting both free trade and protectionism. To choose between the two requires a careful assessment of the pros and cons of each policy regime.

The argument for free trade presented here accepts the notion that free trade may not always be optimal in terms of maximizing economic efficiency. The argument also accepts that free trade may not generate the most preferred distribution of income. In theory, there are numerous cases in which selected protectionism can improve aggregate welfare or could establish a more equal distribution of income. Nevertheless, despite these theoretical possibilities, it remains unclear and perhaps unlikely that selected protectionism could achieve the intended results. First, in many instances, a trade policy is not the best way to achieve the intended improvement in economic efficiency, nor is it likely to be the most efficient way to achieve a more satisfactory distribution of income. Instead, purely domestic tax and subsidy policies dominate. Second, even when a trade policy is the best policy choice, the possibility of retaliations and the likelihood of informational deficiencies or distortions caused by the lobbying process are sufficiently large as to make the intended outcomes unknowable.

In addition, the process of information collection, lobbying, and policy implementation is a costly economic activity. Labor and capital resources are allocated by interest groups attempting to affect policies favorable to them. The government also must expend resources to gather information, to implement and administer policies, and to monitor the effectiveness of these policies. In the United States, the following agencies and groups devote at least some of their time to trade policy implementation: the Office of the United States Trade Representative, the International Trade Commission, the Department of Commerce, the Federal Trade Commission, the Department of Justice, the Congress, and the president, among others. One must wonder whether the cost of this bureaucracy, together with the cost to the private sector to influence the decisions of the government, is worth it, especially when the outcomes are virtually unknowable.

Thus the conclusion reached by many economists is that while free trade may not be “technically optimal,” it remains “pragmatically optimal.” That is, given our informational deficiencies and the other problems inherent in any system of selected protectionism, free trade remains the policy most likely to produce the highest level of economic efficiency attainable.

Key Takeaway

  • While free trade may not be “technically optimal,” it remains “pragmatically optimal”—that is, free trade remains the policy most likely to produce the highest level of economic efficiency that is practically attainable.

Exercise

  1. Jeopardy Question. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

    1. The term used to describe a policy that is relatively easy to implement and has strong positive characteristics but may not be best in all conceivable circumstances.