Here's a conundrum for you.
If trade is such a good thing for all nations,
why does so many nations engage in protectionist trade practices?
Like imposing tools, like tariffs and
quotas to block the import of goods into their countries.
The answer lies in the often difficult politics of protectionism,
and the winners and losers that may arise when a country opens itself up to trade.
To better understand the politics of protectionism,
let us return in our time machine to
another meeting between David Ricardo and the European trade ministers.
It is now two years after these trade ministers had voice their support for free trade.
David Ricardo with his theory of
comparative advantage resoundingly won the argument in favor of trade.
And trade between America and Europe is now flourishing in our example.
Because of such trade,
there is considerable good news for Europe.
Its clothing industry has expanded dramatically on the wings of heavy exports to America,
and profits in the industry are soaring.
On the other hand,
there is bad news as well.
Because of a flood of American food exports into Europe,
thousands of European farmers have been put out of work.
And here's the political problem,
this unemployment in the farm sector has provoked considerable unrest.
Even as the flames of Europe's discontent over trade with America have been stoked by
newspaper editorials that have called for
throwing Europe's political leaders out of office.
Moreover, these very same newspapers and a variety
of forum organizations have called for the imposition
of strict quotas or tariffs on
American food imports so as to protect Europe's beleaguered farming sector.
In fact, this is an age old problem faced by political leaders who support free trade.
The underlying problem is this,
even in the case where free trade provides
gains from trade that will make a nation better off,
there will still be winners and losers.
Sometimes big losers as an economy adjust to freer trade.
Clearly in our example,
while Europe's clothing manufacturers
and the workers in that industry are doing quite well,
Europe's farmers are on the ropes and clamoring politically for help.
Against the backdrop of this kind of political struggle,
now let me ask you this very interesting and challenging question.
If a nation decides to protect an industry from a flood of imports,
which is better from a political perspective: the use of a tariff or the use of a quota?
To put this another way,
will a tariff or quota be more likely to pass
politically once the decision is made to protect the affected industry.
So see if you can think this problem through.
Like I said, it is really interesting,
but it is also highly relevant to the real world.
Jot down your ideas and when you're ready, let's move on.
