By Matilda Giaever-Enger
In 1787, Benjamin Franklin asserted “no nation was ever ruined by trade”. Today, Donald Trump’s brand of economic nationalism featuring steep tariffs and supply-chain reshoring, proffers the counterpoint that free trade under globalisation is ‘unfair’ and net-detrimental. Worldwide, the debate between free trade and protectionism rages on. So, does leveraging comparative advantage leverage economic advantage?
The Myth of Autarky
In the 21st century, economic independence is an illusion. Nowhere is this more evident than in North Korea, whose official ideology of Juche (self-reliance) is contradicted by its dependence on imports of Chinese grain and export of minerals for hard currency to develop technology such as missiles. Nations, whether they acknowledge it or not, require cross-border trade both for necessities and for components to make increasingly complex goods.
The Dependency Trap
However, a ‘laissez-faire’ approach to global free trade doesn’t come without risks. Zambia’s overreliance on copper exports meant that a commodity price crash in the 1970s caused debt distress and economic stagnation. Today, Chile’s dependence on copper for over 50% of its net exports, raises similar concerns. Other nations like the UAE, have used protectionism of new industries like its national airline Emirates, to diversify and avoid the trap of dependence on oil.
Warnings from History
Today’s policymakers may be reminded of the dangers of protectionism from the lessons of the 1930 Smoot-Hawley Tariff Act, enacted to protect domestic employment during the Great Depression. Retaliatory tariffs led to a collapse in both global commerce and US investor confidence. Amplifying consumer price rises, tariffs actually deepened the economic crisis. By contrast, the subsequent General Agreement on Tariffs and Trade (GATT) facilitated trade liberalisation post WWII, fuelling the USA’s rapid economic recovery.
Protectionism Done Right
On the flip side, protectionism can harbour great economic advantages. Concurrent with the GATT, Japan promoted the infant-industry argument. By shielding its nascent industries with tariff barriers and domestic subsidies, Japan nurtured competitive automobile and electronics sectors which earned global success for the likes of Toyota and Sony. This dynamic is echoed today in the rivalry between emergent BYD and Tesla; both are protected by state support for EVs and both compete globally.
Beyond the Balance of Payments
In the past months and years, the world has seen a resurgence in protectionist policy making. The escalating US-China trade war reflects not only discord over current account imbalances, but also deeper geopolitical tensions and security concerns. Meanwhile, the EU’s Carbon Border Adjustment Mechanism (CBAM) prioritises environmental concerns over free trade revenues, through “green protectionism”. While supply nations argue that tariffs on carbon-intensive imports distort international markets, proponents see them as necessary to align trade with climate targets.
A Balancing Act
Ultimately, countries need not make a binary choice between free trade or protectionism. Rather, they can selectively apply the practical lessons of history to maximise advantages. Economic theory champions free trade as Pareto efficient, but the real world is messier. “No nation was ever ruined by trade” – but lasting prosperity lies in striking the right balance.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.