13.3. Why Nations Restrict International Trade

The effect of tariffs, quotas, and other trade restric­tions is to make imported goods and services more costly and therefore less available than they would be otherwise. With fewer goods and services to go around, living standards are reduced for many peo­ple. What arguments, then, could be used to impose restrictions on foreign trade?

Restrictions Protect Industries That Are Essential to the Nation's Defense. Certain indus­tries are vital to the nation's security. If they were taken over by foreign competitors, they might not be available in times of war. For example, the United States subsidizes its merchant marine. Without those subsidies, some argue, shippers would use only foreign ships to transport their merchandise, and the American merchant fleet would go out of business. But shipping, it is argued, is vital to our armed forces in time of war, and for that reason it is in the nation's interest to protect the merchant marine.

Restrictions Protect "Infant Industries."

Nations that are beginning to industrialize often impose tariffs and create other trade restrictions to protect their "infant industries." The belief is that once the industry has had an opportunity to grow, it will be able to compete with its foreign counterpart, and the restrictions can be lifted. In 1791 Alexander Hamilton used this argument to support protective tariffs for America's new industries. Without that protection, American manufacturers might not have been able to compete with the more efficient facto­ries of Western Europe.

Restrictions Diversify the Economy. This argu­ment mimics the "infant industry" argument. The economies of certain nations, particularly less-devel­oped countries (LDCs), depend almost entirely on single crops or products. When a nation leans heavily on one product, however, there is danger that a crop failure or a fall in price will bankrupt the nation. To prevent such a catastrophe, some argue that the government should actively support (with-tariffs and subsidies) new industries to diversify its economy.

Restrictions Protect Us From the Competition of "Cheap Foreign Labor." This may be the most frequently heard argument in favor of protection in this country. Some foreign countries can undersell American goods in the United States because their workers are paid much less than American workers. As a result, American workers have to accept lower wages or lose their jobs to this competition. The gov­ernment, therefore, should protect American work­ers by placing restrictions on the goods produced by "cheap foreign labor."

Restrictions Retaliate Against Controls on American Goods. Some people argue that the United States should retaliate against any country that limits the import of American goods by putting restrictions on their goods.

Restrictions Stimulate Economic Growth. The gross domestic product is the sum of consumer, business, and govern­ment spending and net exports (exports - imports):

GDP = С + I + G + NX

Consequently, strategies to increase exports or reduce imports can be considered as ways to stimu­late growth in GDP. However, restrictions on imports often cause retaliation and also reduce exports.

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