I’d rather suggest it depends.
Market pressure works to strengthen industries and increase innovation if a major part of the nation’s poeple work in the industries that are left to withstand international market pressure on their own. However if these industries are nearly non-existant, international market pressure pressures nothing and rather demotivates entrepreneurial people to play really big and try to found an industrial company. They’ll rather found the umpteenth little restaurant for tourits being afraid that their little companies will not stand up to the pressure of international companies ruling world industrial markets. Founding a restaurant, they need to stand up against local peers, founding a company that is subject to international trade is another, much more threatening thing and might be to much for the self confidence of all but the most daring poeple.
Market pressure is as effective as it is because it is about the fear to lose something and/or to loose relative to others (e.g. status; remember loss avertion!) – and if your motivation not to loose suffices that you don’t loose you are by definition a winner. So from the market perspective you are more a winner because you feared loosing than you are a winner because you wanted and were incentivized to win. That is: markets provide relatively little incentive if there is no core industry to be lost. It follows: the more industries a country has and the bigger they are, the more motivation comes from competition because the country has much to lose. I indeed am a free market radical if we speak about first rate industrial countries! But what is the case for a country like Greece which has very little in terms of high return industrial industries? In this case you do not cause much motivation by fear of loosing the wealth from big profitable industries because there are few and their employees are negligible relative to the entire economy. Instead you need to ask: How do I motivate _indidual_ entrepreneurs to found their companies within industries that are already full of mighty competition on the international market? And how do you as a government provide these incentives if you care about balanced trade (i.e.: you do not want to have to much of foreign credit and seed capital bacause history shows that those lead to bubbles all to easily). The answer is that entrepreneurial poeple who are interested to create new businesses in industries that are not well represented in the country need to know: we will not face the full pressure of the international market at the beginning. Our government both allows and pressures us to learn and grow. As these industries grow, market pressure becomes ever more important as motivator and the trade restrictions necessary to jump-start industries become worrysome because they hinder the fear of loosing something to come into play. Industries are like children you need to protect them in their infancy; however if politicians think with regard to their countries’ industries like horrified mothers do of their children they spoil industries as much as mothers may spoil their children by protecting them for to long. But it is at least as damaging to children and industries not to protect them at all independently of how little they are as it is to over protect them at old-age.
My first conclusion therefore is: The return on free trade depends on the existence of an industry to be pressured that has a chance to survive on the international market.
Another argument against applying free trade arguments to Southern Europe is geography. Trade is a means to participate in the knowledge of those who cross your country in order to trade. However, Southern Europe is not centrally located. It rather is peripheral in a geographic sense if compared to the richer nations of Europe. Therefore trade might not have the same benefits for Southern Europe as it has for countries located in a way that the country is central to trade among other countries – such as France, Germany, or the Northern part of Italy. Moreover it is much more expensive to Southern Europe to provide the infrastructure for trade than it is for the regions named above. After all, these regions have large navigable rivers running through their territory. Southern Europe such as Greece, Spain, and Italy south of Rome do not have any large rivers. They therefore lack the cheapiest means to transport large goods. They’d need to buld railways and roads instead. But because of their peripheral location it is not really a sound proposition as well. The reason is that there are not enough peole interested in crossing the region. It is exactly those poeple who need to finance roads and railways beyond the needs of the local population.
My second conclusion is: The benefits of trade depend on geography.
Of course, tarifs are still troubling as they probably hamper knowledge flowing freely with traded goods across borders. However, I’d rather ensure that Southern Europe participates in the knowledge generated elsewhere through special agreements that give Southern Europeans cheap access to Northern European patents. My reasons for prefering this solution are given above:
- The industrial set-up of Southern Europe
- The geographical position of Southern Europe
My reasoning concerning the market for industrial goods is by the way inline with the empirical evidence. The core of the industries of today’s first rate industrial countries was without exception founded in times when the country was deeply protectionistic. The US had pretty much the highest tariffs of the world in the twenties, using know-how it gained (or stole) within Germany during WWI. Japan was deeply protectionistic at least up to the 80ies. The 19th century protectionism of Germany and France is well known and frowned uppon by the Brits. And the Brits build their industries sitting in the midst of the web of colonies which were due to the huge knowledge gap at the time between Europe and the rest of the world restricted to suply Britain with raw materials and were at the same time markets for British goods. This is not man-made protectionism but neither was that necessary because the UK was the first mover with regard to industrialisation and therefore had not the motivational problems for individual entrepreneurs to think really big and enter industries already occupied by foreign firms (which were nearly non-existant). Of course: these countries removed protectionism as their industries grew. Therefore I am very much on the side of free marketeers if we speak about removing barriers to trade as countries grow relative to more established peers!
My third and final conclusion is: Even countries that are well-postioned to gain from trade did protect infant industries from trade