Wednesday, September 19, 2018
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No Free Lunch

Trade is good

/ 12:32 AM January 13, 2017

Many fear that Donald Trump, soon to assume office as president of the United States, will bring his country and its economy to ruin because, among other things, of his promise to return to trade protectionism. His premise has been that too many American jobs were lost due to the freer entry of foreign goods into the US market, especially from Mexico and Canada under the North American Free Trade Agreement, and from China. The problem is that if he indeed brings down the US economy, he would bring down with it other economies around the world, including ours.

The same reasoning is espoused by those who call for return to more protectionist trade policies elsewhere, including in our own country. Will trade protectionism, or restricting trade across countries, indeed do us good? What motivated us, and all countries worldwide, to foster more active trade in the last three decades in the first place?


The guiding motivation behind a more open trade policy is that a country’s producers must be internationally competitive if they are to be able to sell their products and services beyond their own limited domestic markets. Being able to sell overseas is critical because depending entirely on one’s domestic market limits the potential growth that a producing firm, and an entire economy, can achieve. Even China, with the largest domestic market in the world in terms of number of consumers, saw the need to join the World Trade Organization to have better access to world markets. For a relatively small country like the Philippines, being able to sell our products to the rest of the world is crucial. Our similarly small neighbors, with Vietnam now a notable example, have demonstrated how international competitiveness has allowed them to dynamically grow their economies, create millions of new jobs, and bring down poverty dramatically over the last 25 years.

Shielding domestic producers from foreign competition only undermines their attainment of such international competitiveness. It allows them to charge higher prices from domestic consumers, and therefore operate at higher cost (translation: more inefficiently) than their foreign competitors. In the 1990s, a prominent industrialist who had initially vocally opposed then President Fidel V. Ramos’ trade liberalization policies proudly proclaimed, a few years later, how his company was already exporting its products to the American continent—and found himself thanking Ramos for it.

There is no denying that certain uncompetitive firms that failed to shape up with more open trade were driven to losses and even closure by the strong competition in both domestic and export markets from cheaper producers in, say, China and Vietnam. Here, the government’s job is to provide appropriate safety nets to affected workers. In many cases, lack of competitiveness is actually self-inflicted, with poor internal governance (e.g., poor infrastructure policy), including with the same trade protectionist policies. We lost a major global candy manufacturer to Thailand in the 1990s because we made its primary input much more costly with exceptionally high import tariffs on sugar. The same applied to other products and services highly dependent on protected inputs like petrochemicals, cement, and steel. If we wish to protect jobs in such industries through restrictive trade policies, then we should understand that we are effectively foregoing potentially many more jobs in downstream sectors like plastics and construction.

In short, if renewed trade protectionism is meant to protect jobs, it has to be clear how many and whose jobs are being protected. As the cited examples show, trade protection for some industries may protect certain jobs, but may kill or preclude many more jobs in the process. Meanwhile, one must not forget that consumers—everyone in the economy—are harmed by higher prices that trade protectionism brings about, in favor of a much more limited few. I have always held that the foremost criterion in policymaking should be the pursuit of the greatest good for the greatest number. And for the sake of America and the rest of the world, one hopes that Donald Trump will uphold this.

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TAGS: Donald Trump, fidel v. ramos, trade, US
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