Summary
The majority of theorists who advocate free trade consider it advantageous, from the point of view of maximizing the supply of commodities, even in the case that other countries engage in a protective policy. The argument used again and again is that a country which responds to foreign tariffs by also imposing tariffs thereby moves yet farther away from the advantages of the international division of labour. A more thorough examination, however, shows that a country will be compelled in most cases by effective foreign import limitations to a partial change to relatively unprofitable branches of production, in spite of its adherence to free trade. This change is effected through the classical theory's well-known mechanism of lowering prices and incomes, but it is connected with more or less severe depressive tendencies. One can attain the transposition of a part of labour and capital from export industries to production for domestic demand in a far less painful way, i. e. above all under approximative maintenance of full employment, through retaliative duties (Erwiderungszölle). Such tariffs will not lead to a reduction in commodity production if the price increases connected with their introduction are, relatively, not greater than the price decreases which would be necessary in order to maintain the export in spite of the foreign tariffs. Whether this will be the depends essentially on the degree of foreign protection, the elasticity of the foreign demand for the export goods concerned, and of course on the actual cost differences between the domestic and foreign industries. Reciprocity is usually the decisive condition for the favorable effect of free trade.
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Mahr, A. Unter welchen Voraussetzungen sind Erwiderungszölle wirtschaftlich zweckmässig?. Zeitschr. f. Nationalökonomie 13, 474–493 (1952). https://doi.org/10.1007/BF01311504
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DOI: https://doi.org/10.1007/BF01311504