Four arguments against trade restrictions

What a trade restriction is. A trade restriction is a government measure that limits imports, such as a tariff (a tax on imported goods), an import quota or a voluntary export restraint; it is usually imposed to protect domestic firms and workers from cheaper foreign goods. The four main arguments economists give against such restrictions, using a tariff as the case, are these.

Argument 1: it causes a deadweight loss. A tariff raises the domestic price above the world price. Domestic producers expand output that foreign producers could supply more cheaply (over-production), and buyers cut purchases they valued above the world price (under-consumption). These two losses are gained by nobody, so total surplus falls: the tariff's losses exceed its gains.

Argument 2: consumers lose more than producers gain. With the tariff, consumer surplus falls; producer surplus rises by only part of that loss and the government collects tariff revenue on the imports that remain; what is left is the deadweight loss. So protection is a transfer from the many buyers of a good to its few domestic sellers, at a net cost to the country. For example, a tariff on imported solar panels raises the cost of rooftop solar for every Indian household in order to help a few domestic panel makers.

Argument 3: it gives up the gains from specialisation. Trade lets each country produce what it makes at the lowest opportunity cost (its comparative advantage) and import the rest, so world output and each country's consumption rise. A restriction pulls resources back into goods the country produces at a comparative disadvantage, so the gains from trade, which exceed the losses even when some groups lose, are partly thrown away.

Argument 4: it narrows choice and keeps prices high. Open trade benefits consumers by enlarging their choice of goods and services at lower prices. A restriction shuts out part of that competition, so domestic buyers face fewer varieties at higher prices.

Conclusion. Trade restrictions may protect particular industries, but they reduce total surplus (a deadweight loss), transfer income from consumers to protected producers, undo the gains from specialisation and leave buyers with less choice at higher prices. Since the winners from trade gain more than the losers lose, they could compensate the losers; that is a better answer to the losses than protection.