Free trade agreements have become the talk of the town with India announcing the two largest such agreements with the European Union and the United States.
While the finer details of these deals are yet to be explored, LiveMint’s current quote sheds light on the importance of such deals.
In his seminal book Capital in the 21st Century, French economist Thomas Piketty examined wealth and income inequality and argued that returns to capital outpace economic growth, leading to increased inequality.
“Protectionism does not produce wealth, and free trade and economic openness are ultimately in everyone’s interest,” Piketty said.
What does this mean:
Thomas Piketty says with this quote that restricting trade to protect domestic industry usually makes a country poorer overall. While open trade and economic exchange between nations creates greater prosperity for everyone in the long run.
He said protectionism can temporarily protect certain groups, but usually reduces overall economic growth. He argued that open trade tends to make societies richer, although governments must manage its side effects to make it fair.
What is protectionism?
According to Piketty, protectionism is when a country tries to protect its own industry from foreign competition by using high import tariffs, quotas, bans or restrictions on foreign goods.
Why does it not produce wealth?
Piketty noted that while the intent behind it is usually good—protecting local jobs, supporting domestic businesses, and reducing dependence on other countries—protectionism usually has negative long-term effects—higher prices for consumers, lower efficiency and innovation, trade retaliation, and less overall economic growth.
Why do free trade and openness create wealth?
The French economist believed that economic openness allows countries to specialize in what they produce best, gain access to larger markets for their exports, import cheaper/better goods, and share technology and knowledge.
He said this leads to lower prices, more choice for consumers, higher productivity and faster economic growth.
Over time, according to Piketty, the overall “economic pie” grows larger.
Some other famous economists, including Nobel laureates Paul Krugman and Joseph Stiglitz, also support free trade for growth while emphasizing the need to protect workers affected by globalization.