Free Trade / Liberalisation

Free Trade is the opposite to protectionism.

A - Conversion of producer surplus to consumer surplus
B - Gain in consumer surplus

A + B = Total gain in consumer surplus

Reasons for Free Trade

• Lower prices, reduced inflation
• More innovation
• Sunset industry argument poor way to sustain unemployment
  • Costly and unsustainable way to sustain unemployment, use Education and Training instead
• Loss of economic wealth
  • Tariffs create deadweight loss
• Protectionism is regressive
  • Higher prices from tariffs hit those on lower incomes harder
  • Tariffs are usually placed on food and clothes
• Protectionism causes inefficiencies
  • Firms protected from competition don't have an incentive to reduce costs. This leads to even higher costs
• Trade wars
  • Placing tariffs on imports from one country may cause them to place import tariffs on your country, and you may then retaliate with more tariffs.
• Protectionism is a "second-best" approach to correctly a country's C/A balance
  • Should use supply side policies instead
  • Can be counted as government failure