International Trade Theory and Policy
by Steven M. Suranovic

Trade 5-4

Some Trade Terminology

In trade policy discussions terms such as protectionism, free trade, and trade liberalization are used repeatedly. It is worthwhile to define these terms at the beginning. One other term is commonly used in the analysis of trade models, namely national autarky, or just autarky.

Two extreme states or conditions could potentially be created by national government policies. At one extreme, a government could pursue a "laissez faire" policy with respect to trade and thus impose no regulation whatsoever that would impede (or encourage) the free voluntary exchange of goods between nations. We define this condition as free trade. At the other extreme, a government could impose such restrictive regulations on trade as to eliminate all incentive for international trade. We define this condition in which no international trade occurs as national autarky. Autarky represents a state of isolationism. (See Figure).

Probably, a pure state of free trade or autarky has never existed in the real world. All nations impose some form of trade policies. And probably no government has ever had such complete control over economic activity as to eliminate cross-border trade entirely. The real world, instead, consists of countries that fall somewhere between these two extremes. Some countries, such as Singapore and (formerly) Hong Kong, are considered to be highly free trade oriented. Others, like North Korea and Cuba, have long been relatively closed economies and thus are closer to the state of autarky. The rest of the world lies somewhere in between.

Most policy discussions are not about whether governments should pursue one of these two extremes. Instead, discussions focus on which direction a country should move along the trade spectrum. Since every country today is somewhere in the middle, discussions focus on whether policies should move the nation in the direction of free trade or in the direction of autarky.

A movement in the direction of autarky occurs whenever a new trade policy is implemented if it further restricts the free flow of goods and services between countries. Since new trade policies invariably benefit domestic industries by reducing international competition, it is also referred to as protectionism.

A movement in the direction of free trade occurs when regulations on trade are removed. Since the elimination of trade policies will generally increase the amount of international trade, it is referred to as trade liberalization.

Trade policy discussions typically focus, then, on whether the country should increase protectionism or whether it should pursue trade liberalization.

Note that, according to this definition of protectionism, even policies that encourage trade, such as export subsidies, are considered protectionist since they alter the pattern of trade that would have prevailed in the absence of government intervention. This implies that protectionism is much more complex than can be represented along a single dimension (as suggested in the above diagram) since protection can both increase and decrease trade flows. Nevertheless, the representation of the trade spectrum is useful in a number of ways.


International Trade Theory and Policy - Chapter 5-4: Last Updated on 6/12/06