Free trade versus protectionism

There is an ongoing debate in economic circles about free trade vs. protectionism. I offer an extreme example. If we were to block ourselves off from the outside world entirely, life in South Africa would surely be miserable. At the micro level think of your own household. If you were to manufacture the toaster, the kettle, the geyser etc you wouldn’t get very far in life. Rather we rely on the division and specialisation of labour. I trade with my neighbour who happens to be a doctor and in exchange I offer him my skills in economics. It’s a win-win situation, both of us are better off than before we exchanged our services.

Let’s expand the example and consider the latest fad of millions of South African’s wanting to lead healthier lives. Essentially, these people eat better and exercise more. Now think of what needs to occur in order for this to happen. New kinds of products need to be developed (there are now thousands of weight loss and muscle growth products available) and there are new kinds of food available in supermarkets. There are also new kinds of running shoes, rugby boots, soccer boots, and t-shirts with sweat resistant technology and light reflectors etc.

The list goes on but essentially people need to make all these things, and work in all the places where they are made, in order to meet the growing demand for these goods and services (new people have to be employed to sell and explain the products etc). Through the cooperative endeavours of millions of people across the globe we are able to access these goods – many of which would simply not be available if we did not trade with our neighbours. But who makes sure that consumer demands are met? And who makes sure that the actions of entrepreneurs do not conflict?

No one individual or government has the necessary information to make all of these plans and decisions. What makes all of this ‘work’ is that prices adjust in order to steer resources and knowledge throughout the various economies. No one can see all the processes occurring simultaneously throughout the world. Rather individuals see their little sections. In other words, it’s not necessary to see the entire market, just your section, and this fits in with the rest of the world economy. So if we open a specific market to competition from foreign competitors there will surely be job losses. But the money that people save from being able to access the cheapest goods from the cheapest sources across the globe allows us to specialise in the goods that we produce most cheaply and the money we save can be invested in productive sectors of the economy, which in turn creates jobs in those sectors. There are literally millions of examples of this “creative destruction”.

Author: Jasson Urbach is an economist with the Free Market Foundation. The views expressed in this article are the author’s.

FMF Policy Bulletin/ 19 April 2011