Thomas Piketty believes that restricting trade to protect domestic industries usually makes a country poorer overall.
Free trade agreements have become the talk of the town, thanks to India announcing two of the biggest such deals with the European Union and the United States.
While the finer details of these agreements are yet to be scrutinised, LiveMint’s quote for the day sheds light on the importance of such deals.
In his seminal book, “Capital in the Twenty-First Century”, French economist Thomas Piketty explored wealth and income inequality, arguing that the return on capital outpaces 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.
Here’s what it means:
With this quote, Thomas Piketty means that restricting trade to protect domestic industries usually makes a country poorer overall. While open trade and economic exchange between nations create more prosperity for everyone in the long run.
He said that protectionism may protect certain groups temporarily, but it usually reduces overall economic growth. He argued that open trade tends to make societies richer, though governments must manage its side effects to keep it fair.
What is protectionism?
According to Piketty, protectionism is when a country tries to shield its own industries from foreign competition using high import tariffs, quotas, bans or restrictions on foreign goods.
Why does it not produce wealth?
Piketty noted that while the intention 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 specialise in what they produce best, get access to bigger markets for their exports, import cheaper/better goods, and share technology and knowledge.
He said that this leads to lower prices, more choices for consumers, higher productivity, and faster economic growth.
Over time, Piketty said, the total “economic pie” becomes larger.
Some other famous economists, including Nobel Prize winners Paul Krugman and Joseph Stiglitz, also support free trade for growth, while emphasising the need to protect workers affected by globalisation.
