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Economic Insights
FEDERAL RESERVE BANK OF DALLAS VOLUME 6, NUMBER 2

Economic Protectionism
No policy has failed as often, or been as widely applied and enthusiastically believed, as
economic protectionism. Ever since the rise of the modern nation-state in 15th century Europe,
and with it the birth of international trade, the doctrine economists call mercantilism has dominated the thinking of the majority of the world's peoples and, therefore, most of their political
leaders. In spite of masterful dissections and refutations of mercantilism by Adam Smith, David
Ricardo and Frédéric Bastiat, the protectionist dogma remains powerfully alluring for tens of
millions of people around the world.
If economists made a list of things they generally agree on, free trade would likely be
at the top of the list. Yet it remains a hard sell for the general population. And so we offer
you this short primer by our colleague Dwight Lee on the costs of protectionism. Like Dracula,
protectionism never really dies, and we who support free trade must always keep our intellectual wooden stakes sharp and ready.
— Bob McTeer
President
Federal Reserve Bank of Dallas

The purpose of all productive economic activity is consumption. As the
great 19th century French economic
pamphleteer Frédéric Bastiat wrote,
“Consumption is the end, the final cause,
of all economic phenomena, and it is
consequently in consumption that their
ultimate and definitive justification is to
be found.” 1
People work and invest to earn the
money to buy what they want to consume, which requires producing (either
directly or indirectly) goods and services others want to consume. Many
people enjoy working, which can be a
form of consumption itself. Accepting
lower wages for the opportunity to
perform more enjoyable work is no different than paying for consumption:
Workers give up one type of consumption in exchange for on-the-job consumption. So all work is directed
toward increasing the value of consumption. As Bastiat observed, “The

immediate self-interest of the consumer
follows a line parallel to that of the
public interest. He may extend his
secret wishes to fantastic or absurd
lengths; yet they will not cease to be in
conformity with the interests of his fellow man.” 2
As primary as consumption is, its
influence is commonly secondary to
production’s when it comes to trade
policy.
To some degree, a strong emphasis
on production is justified. After all, consumption comes before production
only in the dictionary. Few things are
more destructive than concentrating on
grandiose redistribution schemes with
no thought to their negative effect on
incentives to produce. The supply-side
movement focuses attention on the distorting impact high marginal tax rates
have on production decisions. Lower
marginal tax rates reduce the difference
between what consumers pay and what

producers receive and make producers
more responsive to consumer demands.
Unfortunately, political decisions
aimed at promoting production typically make producers less responsive to
consumers. Instead of seeing production as the means of serving consumer
interests, producers’ interests are treated
as ends in themselves. The result is a
reduction in the value of what is produced, which is, since we are all consumers, a sure prescription for making
most people worse off.

A Political Distortion
Why do politicians enact policies
that supposedly favor producers but
can sometimes have the effect of harming almost everyone? The answer lies in
a distortion inherent in the political
process. Relatively small groups organized around a common concern, such
as producers in a particular industry,
are well positioned and strongly motivated to communicate their wishes. On
the other hand, the general consuming
public is too large and too diverse to
communicate a clear and consistent
message through the political process.
Elected and appointed officials constantly make decisions crucial to consumer welfare, but seldom in forums
easily accessed by consumers. Every
major industry, however, maintains an
army of lobbyists whose full-time job is
to access those forums and influence
the decisions made there.
So when considering actions that
would concentrate benefits on a particular industry while spreading the costs
among all consumers, decisionmakers
will hear much from industry but will
hear little or nothing from consumers.
As a result, producer interests invariably
trump consumer interests. Policies that

serve the interests of producers are
almost always harmful to consumers.
According to Bastiat:

The Folly of Trade Restrictions

In so far as we are producers, it
must be admitted, each of us has
hopes that are antisocial. Are we
vineyardists? We should be little displeased if all the vines in the world
save ours were blighted by frost.…
Are we the owners of ironworks?
We want no other iron to be on the
market but our own, whatever may
be the public need for it.…Are we
farmers? We say…let bread be
costly, that is to say, scarce, and the
farmers will prosper.…
It follows that, if the secret wishes
of each producer were realized, the
world would speedily retrogress
toward barbarism.3

What is prudence in the conduct of every private family can scarce be folly in that of a
great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry
employed in a way in which we have some advantage. The general industry of the country,
being always in proportion to the capital which employs it, will not thereby be diminished, no
more than that of the above-mentioned artificers; but only left to find out the way in which it
can be employed with the greatest advantage. It is certainly not employed to the greatest
advantage when it is thus directed towards an object which it can buy cheaper than it can
make. The value of its annual produce is certainly more or less diminished when it is thus
turned away from producing commodities evidently of more value than the commodity which
it is directed to produce. According to the supposition, that commodity could be purchased
from foreign countries cheaper than it can be made at home. It could, therefore, have been
purchased with a part only of the commodities, or, what is the same thing, with a part only of
the price of the commodities, which the industry employed by an equal capital would have
produced at home, had it been left to follow its natural course. The industry of the country,
therefore, is thus turned away from a more to a less advantageous employment, and the
exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation. ■

But is the bias in favor of producer
interests guaranteed to make most people worse off? Isn’t it possible some
producers will come out ahead because
they gain more as producers from their
political influence than they lose as
consumers? It is possible but very
unlikely. If the prices of only a few
industries’ products were raised, producers could, on balance, gain. The
trouble is that the number of industries
securing protections or subsidies will
not be limited to a few. The process
may start with a few, but their success
will inspire others who see profit in
diverting efforts from increasing productivity to seeking political advantage.
Bastiat recognized this problem and its
implications in writing: “The state is the
great fictitious entity by which everyone seeks to live at the expense of
everyone else.” 4
Such policies are obviously a losing
proposition. A majority would be better
off relinquishing protections and increasing productivity by responding
more aggressively to consumer demands. But no one industry would
benefit unilaterally from doing so.
Piracy can be personally profitable if
the pirates are few and the victims are
many. But poverty is the unavoidable

—From Adam Smith, The Wealth of Nations

result when everyone is a pirate and no
one is shipping the prospective loot.
Yet who is going to lower his Jolly
Roger and get back to shipping goods
when he is surrounded by pirates?
There is no better example of political piracy or of people attempting to
live at the expense of each other than
regulated international trade. Progress
has been made in recent decades in
reducing some barriers to international
trade, both in the United States and
other countries. But this progress is
never safe from the dynamics of special-interest politics, and there is little
evidence the real case for free trade is
well understood even by politicians
who say they favor it.

Free Trade Is for Consumers,
Not Producers
Most politicians say they favor free
trade but invariably add that their support depends on trade being “fair.” At a
minimum they mean we should open
our markets to another country’s products only if their markets are equally

open to ours.5 This qualification is generally an excuse for catering to the
demands of organized interests, but it’s
usually accepted because people are
easily convinced it makes economic
sense. Why should we give other countries the opportunity to increase output
and employment at the expense of
ours? “We shouldn’t,” is the obvious
answer, but it misses the primary
advantage of international trade, which
is increasing our ability to consume the
products we value most. Furthermore,
it reflects the political bias toward
organized interests that distorts government decisions.
The advantage of trade with other
countries is not that we can create
domestic jobs by selling more to foreigners than they sell to us. Simply
creating more jobs isn’t the key to a
successful economy. Since our desire
to consume will always exceed our
ability to produce, there will never be
a lack of work. A successful economy
redirects people into the jobs that make
best use of their productive abilities—

that is, into the jobs that create the most
value for consumers. This is the real
advantage of international trade.
We create productive domestic jobs
both when we sell and when we buy
from other countries, and the more
open the trade, the better for all countries. By creating more productive jobs
through international trade, we expand
our ability to consume, which is tantamount to raising real incomes. When
country B restricts the import of U.S.
products, it reduces its productivity as
well as ours. But we only compound
our productivity loss if we respond by
restricting the ability of our citizens to
buy products from country B.
Despite the prevailing rhetoric, we
create American jobs when we buy
from foreign producers. Politicians who
favor free trade often make this point,
which is true enough but misses the
real advantages of free trade. It would
be better for Americans if importing
foreign products didn’t create American
jobs. When Americans buy products
from, say, Japan, we end up with products we value more than what the dollars spent could have bought domestically and the Japanese end up with the
dollars. (Actually, the party who sells
yen to American importers to pay for
the Japanese products ends up with
more dollars, but this doesn’t meaningfully alter the story.)
What do the Japanese do with the
dollars? Wouldn’t it be nice if they
treated them as collectibles to be kept
and admired? Then Americans could
obtain products by doing nothing more
costly than printing money. We would
be making purchases with what amounts
to checks that remain uncashed.
Unfortunately, the Japanese produce goods for Americans not because
they want dollars but because they
want what those dollars can buy. Those
dollars eventually come back to
America as claims on goods produced
by U.S. workers or as investments in
America that create domestic employment opportunities. They may not all
come directly back from Japan, but

The Advantage of
Comparative Advantage
Two men can both make shoes and
hats, and one is superior to the other in
both employments; but in making hats he
can only exceed his competitor by onefifth or 20 per cent; and in making shoes
he can excel him by one-third or 33 per
cent: will it not be in the interest of both
that the superior man should employ
himself exclusively in making shoes, and
the inferior man in making hats. ■
— From David Ricardo, The Works and
Correspondence of David Ricardo

they do eventually come back. In the
long run, the checks always get cashed.
This is not to deny that restrictions
on foreign imports can save some U.S.
jobs. But because these jobs cannot
survive the competition of international
trade, they obviously don’t create as
much value as those that survive (and
expand) against foreign competition.
Foreign trade only eliminates jobs that
produce goods domestic consumers
can obtain more cheaply by shifting
their efforts into more productive
employment and then trading. Unfortunately, the general benefits from unrestricted imports (lower prices for
consumers and a more productive
economy) are largely ignored, and
imports are seen as a threat to existing
domestic jobs.
As discussed above, the existing
industries and employees harmed by
freer trade have an overriding concern
with enacting protection against foreign
competition and are easily organized to
influence political decisions on the subject. This influence is often countered
to some degree by industries that export much of their output and would
be able to expand if trade barriers were
reduced. But those who would be able
to start new firms or secure higher paying jobs under liberalized trade are
often unaware of what trade barriers

are costing them, and in any event,
they generally aren’t organized for
political action. Further, the bulk of the
benefits from freer trade go to consumers, who are too numerous, too dispersed and too varied in their interests
to organize against trade restrictions.
This bias in favor of special interests explains a host of political tendencies. It explains, for example, the difficulty politicians have cutting spending
programs because these programs tend
to concentrate benefits on organized
interest groups. Since the tax burden is
spread across a large universe of taxpayers, none of them has much incentive to seek repeal. Additionally, the
resources special interests expend
attempting to secure these programs
could have been more profitably
employed elsewhere. This bias also
explains the political perspective on
free trade, which emphasizes the
advantage in protecting existing jobs
over the far greater, but much more
general, advantages of better choices
for consumers and improved economic
productivity.
Bastiat understood this problem,
both as it relates to trade policy and to
government activity in general:
There is only one difference
between a bad economist and a
good one: the bad economist confines himself to the visible effect;
the good economist takes into
account both the effect that can be
seen and those effects that must be
foreseen.
Yet this difference is tremendous;
for it almost always happens that
when the immediate consequence is
favorable, the later consequences are
disastrous, and vice versa. Whence it
follows that the bad economist pursues a small present good that will
be followed by a great evil to come,
while the good economist pursues a
great good to come, at the risk of a
small present evil.6

By Bastiat’s definition, on most
issues —and certainly on the issue of

international trade —almost all economists are good economists. Economists
almost unanimously favor free trade
because they recognize that the easily
seen effects of higher prices and increased employment in protected industries are more than offset by the
destruction of both consumption value
and the potentially more productive
jobs that are not created. These other
effects are difficult to see because they
are dispersed, delayed and often invisible.
Economists have a difficult time
making their case politically because of
the problem of the seen versus the
unseen. Not only is it easier to rally
public opinion in favor of seen benefits
rather than unseen benefits, but interest
groups are more likely to be organized
in favor of seen benefits (those they
currently receive) than unseen benefits
(those they could have but currently
do not).
It is easy for politicians and protectionists to point to existing factories
and jobs that will be eliminated by foreign competition. What cannot be readily seen are the costs of trade protection: inefficient, second-best uses for
capital and labor, higher consumer
prices, fewer incentives for protected
firms to innovate and improve quality,
and an overall decline in welfare due to
constricted consumer choices. Because
these costs are difficult to see, they typically don’t influence many votes. What
can determine a politician’s election or
defeat are the votes of those whose
jobs are lost to foreign competition. So
officeholders’ propensity to vote for
protectionist policy is understandable
in terms of their own, private welfare
calculations. Unfortunately, such proprotection votes will lower the welfare
of the majority of their constituents.
If the political process paid as
much heed to the potential gains of
unorganized consumers as it does to
the current gain of organized producers, many government restrictions
on our economic choices would be
quickly eliminated. The first to go

would be restrictions on our ability to
buy the best products at the lowest
prices, whether produced at home or
abroad. ■
—Dwight R. Lee
Professor of Economics,
Terry School of Business,
University of Georgia, and
Visiting Scholar,
Federal Reserve Bank of Dallas

Notes
1
2
3
4
5

6

Bastiat (1996), 36.
Bastiat (1996), 13.
Bastiat (1996), 11.
Bastiat (1995), 144.
Other qualifications are commonly added
as well. Increasingly, fair trade means that
the countries we trade with have to provide
pay and working conditions, and impose
environmental standards, that don’t offend
the sensitivities of affluent Americans. These
qualifications are unrealistic for all but a few
wealthy countries and are seldom more than
excuses for maintaining existing trade
restrictions or even adding more. Generally,
however, the imposition of such “humanitarian” restrictions harms the very people
in whose name they are enacted.
Bastiat (1995), 1.

Suggested Reading
Bhagwati, Jagish, Protectionism (Cambridge,
Mass.: MIT Press, 1988).
Bovard, James, The Fair Trade Fraud (New
York: St. Martin’s Press, 1992).
Buchholz, Todd G., New Ideas from Dead
Economists: An Introduction to Modern
Economic Thought (New York: Plume Books,
1990), Chap. 6, 68 – 90.
Krauss, Melvyn B., How Nations Grow Rich:
The Case for Free Trade (New York: Oxford
University Press, 1997).
Messerlin, Patrick A., Measuring the Costs of
Protectionism in Europe: European Commercial
Policy for the 2000s (Washington, D.C.:
Institute for International Economics, 2001).
Rowley, Charles K., Willem Thorbecke and
Richard E. Wagner, Trade Protection in the
United States (Hansford, U.K.: Edward Elgar,
1995).

References
Bastiat, Frédéric, Economic Sophisms
(Irvington-on-Hudson, N.Y.: The Foundation for
Economic Education, 1996).
———, Selected Essays on Political Economy
(Irvington-on-Hudson, N.Y.: The Foundation for
Economic Education, 1995).
Ricardo, David, The Works and Correspondence of David Ricardo, vol. 1, ed. Piero Sraffa
and Maurice Dobb (Cambridge: Cambridge
University Press, 1951).
Smith, Adam, The Wealth of Nations
(Indianapolis: Liberty Fund/Liberty Press,
1981).

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