larger world markets and allows them to realize economies of scale more fully. - Increased competition - A company shielded from foreign competitors is more likely to have market power, which in turn gives it the ability to raise prices above competitive levels. This is a type of market failure. Opening up trade fosters competition and gives the invisible hand a better chance to work its magic. - Enhanced flow of ideas - The transfer of technological advances around the world is often thought to be linked to the trading of the goods that embody those advances. The best way for a poor agricultural nation to learn about the computer
revolution, for instance, is to buy some computers from abroad rather than trying to make them domestically. - Free international trade - increases variety for consumers - allows firms to take advantage of economies of scale - makes markets more competitive - facilitates the spread of technology 9.3: Arguments for Restricting Trade - The Isoland Trade - Free trade would, therefore, cause the price of textiles to fall and hurt domestic textile producers. - the textile companies oppose free trade in textiles. They believe that the government should protect the domestic textile industry from foreign competition. - The Jobs Argument - Opponents of free trade often argue that trade with other countries destroys domestic jobs. - In example, free trade would allow price of textiles to fall, reducing the quantity of textiles produced in Isoland and thus reducing employment in the Isolandian textile industry - Isolandian textile workers would lose their jobs. - free trade creates jobs at the same time that it destroys them - the gains from trade are based on comparative advantage, not absolute advantage. - Even if one country is better than another country at producing everything, each country can still gain from trading with the other. Workers in each country will eventually find jobs in an industry in which that country has a comparative advantage. - The National Security Argument - When an industry is threatened with competition from other countries, oppo- nents of free trade often argue that the industry is vital to national security. - If Isoland were considering free trade in steel, domestic steel companies might point out that steel is used to make guns and tanks. Free trade would allow Isoland to become dependent on foreign countries to supply steel. If a war later broke out and the foreign supply was interrupted, Isoland might be unable to produce enough steel and weapons to defend itself. - Companies have an incentive to exaggerate their role in national defense to obtain protection from foreign competition. - A nation’s generals may see things very differently. Indeed, when the military is a consumer of an industry’s output, it would benefit from imports. Cheaper steel in Isoland, for example, would allow the Isolandian military to accumulate a stockpile of weapons at lower cost.