We start with the question ‘why do countries trade?’ At first sight this seems too
obvious to deserve very much attention, but in a world of politically motivated
nation states, trade cannot be taken for granted. If countries do not believe that
trade is in their interest they can close their borders. China, the USSR, and Japan
have all followed this policy in recent history. A policy of not trading, or limiting
trade by tariffs or quotas, is known as ‘protectionism’, or in its extreme form
‘isolationism’. It seeks to exclude the goods produced by foreigners from local
markets in order to protect the livelihood of local producers. Protectionism can
look very attractive to a community which feels that its livelihood is under threat.
One reason for adopting these policies is to protect local resources. It may seem
that valuable raw materials are being exported by unprincipled traders, leaving
nothing for the local inhabitants. When the reserves are all gone, the country will
be left in poverty.2 Another is to protect local jobs and skills which have been
developed over many years. If the local shipyard or car plant, on which thousands
of jobs depend, is about to close because it cannot compete with foreign yards,
offering subsidies or passing laws preventing imports is a natural response. After
all, this could be just the beginning. Soon other industries will be under attack and
then how will the country earn its living? Currency reserves will drain away and
the country will be left in poverty. Or will it?