The tariff debate: rethinking the concepts of open and closed economy and other related ideas
By Lorenzo Bona
In a time when the word "tariff" frequently seems to dominate many debates, it appears helpful to reflect on the broader implications of trade and its role in human progress.
Early long-distance trade practices seem to have emerged from a profound realization: no single place on Earth could sustainably provide every resource necessary for human well-being.
This insight sparked a transformational movement, laying the foundation for what we now recognize as international trade.
If we adopt some level of abstraction from reality and embrace an economic perspective along with some of its theoretical concepts, this can be understood through the notion of open economy, which can be used to describe a country that embraces international trade.
Conversely, the idea of closed economy can be used to refer to a country that does not engage in such practices.
The distinction is significant, although today no country seems to function as a completely closed economy. If operating as a relatively closed economy, a country restricts itself to consuming primarily what it produces domestically, with effects that tend to limit its potential for economic growth and improvements in living standards.
In contrast, open economies that engage without excessive limitations in import-export activities, encouraging specialization, have access to goods and resources beyond their own production capabilities. This broadens the range of available products, increases productivity, and enhances the quality of life for their populations.
Historically, the benefits of trade seem to have extended far beyond the sheer volume of goods exchanged.
Research in economic history suggests that early societies recognized the great value of imported goods, such as rare minerals like obsidian for crafting durable tools, which enhanced productivity and living conditions. Over time, trade became a catalyst for human progress, driving an extraordinary expansion of population and resources.
These studies also suggest that early groups seeking scarce resources began exchanging gifts strategically, transforming gestures of goodwill into signals of peaceful intent. This allowed access to neighboring territories and vital resources.
By integrating distant markets, these trade practices fostered innovation, mutual growth, and collaborative efficiencies. They also promoted peaceful relationships and deeper understanding among individuals, achieving socio-economic outcomes no isolated region could achieve alone.
Despite its undeniable benefits, trade appears to be sometimes overlooked or overshadowed by calls for tariffs and trade barriers.
These measures are frequently presented as solutions to economic challenges, but their broader impact may hinder global commerce. While tariffs may offer temporary protection to certain domestic industries, most economists tend to agree that they are ultimately economically counterproductive. Tariffs artificially inflate the prices of imported goods, reducing consumer choice and purchasing power. Although they may benefit a few national companies in the short term, they tend to harm the majority by creating inefficiencies and raising costs across the economy.
In contrast, from an economic standpoint and its abstract principles, markets can be seen as discovery mechanisms driven by competition, with the goal of providing better products at more competitive prices. In this framework, free trade fosters competition, drives innovation, and enhances economic resilience.
Open economies benefit from diversified markets and a reduced dependence on any single region, enabling them to adapt and thrive even in the face of contexts that tend to constantly introduce new problems to be solved.
Considering all this, it seems that the abstract logic of economics might still offer valuable insights to guide us through a period marked by many geopolitical uncertainties.
One of these lessons seems to be that it is still important to cultivate the hope that societies will be able to continue to nurture entrepreneurial mindsets, support businesses in expanding globally, and champion a future where international trade thrives.
As history seem to suggest, the benefits of trade extend far beyond economics: it is a critical force for fostering understanding, cooperation, and the continued advancement of civilization.