The creation of the North American Free Trade Agreement and the World Trade Organization stepped up the controversy between protectionists and free traders. Protectionists argue that imports should be limited to reduce foreign competition with goods produced in the United States, to remedy balance of trade and balance of payments problems, and to encourage U.S. industries vital to national security and economic welfare. Free traders maintain that the economic welfare of a country is enhanced by voluntary free exchange among countries.
        A country's consumption possibilities are greater when it trades with other countries than when it does not. By concentrating on the production of goods in which it has a comparative advantage and trading for goods in which it has a comparative disadvantage, the population of the country will have a larger GDP to consume and/or invest.
        International exchange markets arise from international transactions. A country's demands for foreign exchange are generated by imports of goods, investments in other countries, and any other transactions that result in payments made abroad. Supplies of foreign exchange are created by exports, by foreign investments in the country, and by any other transactions that cause payments to be made to the country. Exchange rates are determined by the forces of demand for and supply of currencies used in international trade.
        Trade restrictions generally take the form of tariffs, quotas, voluntary restraint agreements, or embargoes—all four of which result in higher prices for imports as well as domestically produced goods and services. Further, trade restrictions reduce the availability of products at the consumer level. Governments can raise revenue through the imposition of tariffs, but quotas result in extra profit for holders of import licenses. Recently, voluntary restraint agreements have become more widespread, but they are difficult to enforce and are often influenced by international political relations.
        Economic analysis indicates that a country's population as a whole usually loses as a result of import restrictions. Gains to the protected industries come at the expense of export industries and consumers. Balance of payments problems are essentially exchange rate problems arising when countries attempt to peg exchange rates. It appears that the preferred solution to such problems is exchange rate adjustment rather than protectionism. Protection of key industries may have some merit—if only we could determine which industries properly fall into this category.
        In recent years, nations have sought the benefits of free trade by reducing international trade restrictions worldwide. The WTO has been instrumental in minimizing the barriers to trade between member countries. The nations of western Europe formed the EU, and the United States entered into NAFTAin order to reap the benefits of free trade. Other groups of nations around the world have followed suit, forming their own regional customs unions and free trade areas. Many people still support protectionist policies, but the trend is toward more open markets and global economies.