This fear is somewhat reasonable—foreign products can erode domestic producers’ market share, especially if they’re cheaper (as they often are, given lower labor costs in many parts of the developing world). But this isn’t automatic. As long as domestic producers continue providing products people want, and at a reasonable price, they’ll have a market—they may just have to become more competitive in order to stay viable.
Sometimes governments will launch “trade adjustment assistance” programs to help domestic firms through the transition process, either advising on how to adjust business models or even providing temporary subsidies. But the benefits of these programs are questionable—they’re not cheap for governments to provide, and the federal support lowers businesses’ incentives to become more competitive on their own. France provides a good example: French automakers couldn’t weather competition from technologically superior South Korean cars, so François Hollande’s government decided to subsidize the industry. Why would French automakers go to the trouble of revamping their product if subsidies can keep them afloat?
Now, contrast this with the South Korean film industry.
In 2006, the Korean government removed the cap on foreign films, providing a deluge of competition for Korean filmmakers. For the next four years, audiences for Korean films dwindled as Korean moviegoers opted for superior Hollywood movies.
But in 2010, Korean filmmakers fought back. They didn’t ask the government for subsidies or renewed trade barriers. Instead, they simply made better films! Filmmakers got more creative, tackling more varied genres and more interesting—and often, more uniquely Korean—subject matter. Scripts and production values improved, as did acting quality. As a result, more than 100 million Korean moviegoers saw domestic films in theaters this year, and Korean films started becoming more popular overseas.
In short, Korean filmmakers’ self-determination not only saved their industry domestically, but made it more internationally competitive—allowing it to fully benefit from Korea’s free trade agreements with the US, EU and ASEAN.
So next time anyone tells you free trade is a losing proposition, tell them Korea’s story.