International Trade Theory and Policy
by Steven M. Suranovic

Trade 120-6

Free Trade as the "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 theory shows 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. In the first place, in many instances 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. Secondly, even when 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 also expend resources to gather information, to implement and administer policies, and to monitor the effectiveness of these policies. In the US the following agencies and groups devote at least some of their time to trade policy implementation: the US Trade Representative's office, the International Trade Commission, the Department of Commerce, the Federal Trade Commission, the Justice Department, 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 are 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 with any system of selected protectionism, free trade remains the policy most likely to produce the highest level of economic efficiency attainable.

The End

International Trade Theory and Policy - Chapter 120-6: Last Updated on 7/19/97