Economic Factor #8: Free Trade

Economic Factor #8: Free Trade

Free international trade is vital to economic prosperity. While large, well diversified and geographically isolated countries such as the U.S. can have relatively less dependence on international trade, small countries often rely heavily on international trade to obtain the diverse spectrum of goods and services needed by their people. For example, only about 25% of countries actually manufacture cars.


However, free trade can be punishing to inefficient producers and workers. And therein lie the seeds of protectionism and mercantilism. Mercantilism is the economic and political philosophy that a nation’s trade policies should be focused on regulating imports and exports to accumulate wealth, much like a business strives to generate profits by controlling revenues and expenses. Mercantilism leads to tariffs, trade barriers, subsidies and other protectionist policies. It is damaging to the long run economic growth of a society. Mercantilism allowed American automobile manufacturers, steel manufacturers, electronics manufacturers and others to decline in efficiency and quality while the manufacturers of Japan, Korea, China and other nations soared in efficiency and quality. American industries saw no need to seek greater quality and efficiency as long as they faced little or no competition from abroad. American ingenuity became focused on protectionism rather than innovation.

Of course crony capitalists will lobby for “temporary” tariffs and other barriers to trade, using the argument that they need just a little more time to prepare for the competition. But the delays caused by protectionism are catastrophic – the American auto industry is still trying to recover from the disastrous failures of the 1960s, 1970s and 1980s.
At the time of this writing, it is hard to forecast whether the Trump administration will enhance free trade by negotiating trade deals that are more “fair”, or whether it will go down the path of protectionism that leads to long term economic stagnation.
Importance of factor in general: A-
Prospective influence of this factor on the U.S. economy: C+
Previous Economic Factors:
Introduction and Factor One: Fiscal Policy
Factor Two: Monetary Policy
Factor Three: Cronyism
Factor Four: Innovation and Regulation
Factor Five: Demographics
Factor Six: Biorhythms
Factor Seven: Institutions

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