With the Trump administration being back in office since January 2025, the topic of international trade and protectionism is becoming highly relevant again across the globe. In this article, we will explore the different forms of international trade and how they relate to a nation’s interests.
What is International Trade?
International trade refers to countries importing and exporting goods and services from each other. There are many rules and international laws set forth to regulate the terms of international trade. Most countries are members of the World Trade Organization, which operates as the governing body for trade globally. Countries can also establish their own rules among each other and create free trade agreements. In general, there exist two main views on global trade: Protectionism vs. Free Trade.
Protectionism
Protectionism refers to an economic policy that imposes barriers on trade between nations. Countries who practice protectionism generally impose high tariffs (taxes on imported goods) and strict quotas (limit on number of imports allowed into a country) in order to maintain lower trade.
Protectionist governments adopt such policies to protect their local producers from competition from other nations, which may offer goods and services at lower costs. However, while this narrative may be true for some individuals and companies, society as a whole is typically better off when countries trade.
On the one hand, domestic companies which are in competition with foreign companies for the same product might benefit from protectionsim since the price of the imported good is higher and consumers prefer to buy the (cheaper) domestic product. On the other hand, domestic companies which need the same product as input for producing their own goods and services might be worse off with protectionism since they need to pay a higher price compared to the (cheaper) foreign product, leading to lower profit margins or the need to increase prices (see below the impact of protectionism on inflation).
Protectionism also affects consumers since it minimizes the range of goods and services to purchase from. The foreign product may better fit their needs than similar domestic offerings or it may simply not be available domestically.
Another implication of protectionism that is highly relevant for consumers is inflation, since imported goods and services become more expensive due to tariffs and domestic companies have less incentives to increase productivity and innovation and thereby reduce prices. Moreover, protectionism leads to higher production costs for domestic companies that need to import raw materials and semi-finished goods to produce their products (see above). These higher production costs are typically passed on to the end consumers (see also our article on Inflation).
Free trade
Free trade refers to an economic policy in which a country does all it can to promote trade with other countries. It imposes no barriers to trade and develops agreements with other countries to facilitate trade.
In contrast to protectionism, free trade fosters global competition and welfare, typically leads to lower prices of goods and services, and hence lower inflation rates. On the other side, free trade puts domestic companies in competition with companies from all over the world, which might be exposed to more favorable regulatory and governmental conditions (e.g., subsidies) or have a technological advantage to produce goods more efficiently.
To understand why free trade among countries leads to higher living standards across the globe, let’s examine the concept of Comparative advantage which has been formulated by economist David Ricardo and is one of the most important concepts in economics.
Ricardo observed that trade is driven by comparative rather than absolute costs of producing a good. One country may be more productive than others in producing different goods, in the sense that it can produce any good using fewer inputs (such as capital and labor) than other countries require to produce the same good. Ricardo’s insight was that such a country would still benefit from trading according to its comparative advantage — exporting products in which its absolute advantage was greatest, and importing products in which its absolute advantage was comparatively less (even if still positive).
Consider the following example: In Germany, one hour of labor can produce either three kilograms of steel or two shirts. In Bangladesh, one hour of labor can produce either one kilogram of steel or one shirt.
Germany is more efficient in both products (one hour of labor can produce more steel and shirts compared to Bangladesh). Now suppose Bangladesh offers to sell Germany two shirts in exchange for 2 kilograms of steel.
To produce these additional two shirts, Bangladesh diverts two hours of work from producing (two kilograms) steel. Germany diverts one hour of work from producing (two) shirts. It uses that hour of work to instead produce three additional kilograms of steel.
Overall, the same number of shirts is produced: Germany produces two fewer shirts, but Bangladesh produces two additional shirts. However, more steel is now produced than before: Germany produces three additional kilograms of steel, while Bangladesh reduces its steel output by two kilograms. The extra kilogram of steel is a measure of the gains from trade.
Though Germany may be twice as productive as Bangladesh in making clothing, if it is three times as productive in making steel, it will benefit from making and exporting steel and importing clothes. Bangladesh will gain by exporting clothes, in which it has a comparative but not absolute advantage, leading to higher living standards in both Germany and Bangladesh.
With this simplified example, it becomes evident that free trade and specialization on the production of goods where a country has a comparative advantage leads to higher overall economic output while fostering economic activity in (developing) countries which might be less efficient in producing goods and services (absolute disadvantage).
Summary
Consumers are generally in favor of free trade, since they pay lower tariffs, have a higher market to purchase from, and benefit from the competition among producers which results in lower prices.
Overall, free trade contributes to global efficiency. When a country opens up to trade, capital and labor shift toward industries in which they are used more efficiently. That movement provides society a higher level of economic welfare. However, these effects are only part of the story.
Businesses and their employees may be torn on which side they stand on. On the one hand, businesses who produce goods may wish to export to international markets but do not want to face competition at home. In the example of trade between Germany and Bangladesh described above, companies which produce shirts in Germany may be in favor of restricted trade to maintain domestic production. On the other hand, steel companies in Germany and shirt companies in Bangladesh may be in favor of free trade.
