Free Trade Versus Protectionism Policies

Subject: Economics
Pages: 10
Words: 2836
Reading time:
12 min
Study level: PhD

Abstract

International trade refers to trade among countries; it is an important element in globalization. However, international trade is faced with barriers to trade imposed by governments in their efforts to protect their economies. Barriers are both trade and non-trade barriers. These protectionism barriers end up hurting the same economy that they were imposed to protect and further injure international traders.

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Executive summary

Protectionism policies are aimed at protecting an imposing country’s economy from the control of international economies. It aims at creating a haven for the local industries; on the other hand, free trade policy is a trade where government tariff and non-tariff barriers don’t exist. When trading barriers are enacted, they have an effect on international trade, and depending on the angle that an economy is looking at it, it may be negative or favorable. On the favorable side, protectionism policies lead to nurturing domestic industry to levels that can compete internationally. On the other side, protectionism leads to reduced economic growth, increased prices of goods, inefficiency in resources utilization, and lengthen the duration of maturity of the same local industries they are imposed to protect (see appendix 1 and 2 for world’s main international traders and most traded goods respectively).

Free trade v/s protectionism policies

International trade is trade among countries; it involves imports and exports. Globalization has favored the need for trade among countries as it brings numerous advantages to participating economies. Free trade is attained when countries remove trade and non-trade barriers among themselves and allow the free flow of goods and factors of production. However, some economic policies are implemented by different governments to protect their local industries from international traders, they are called protectionism policies (Krugman, 1987). Protectionism policies are economic policies that impose trade and non-trade barriers, in the efforts of protecting local industries, and limiting the level of control that international trade has on the local market. The barrier includes trade quotas, tariffs, subsidies, and other restrictive government policies like Visa allocation regulations. There are arguments for protectionism and against it. This paper discusses counterarguments for the implementation of protectionist policies. It will approach the subject from a general point of view but use a real and hypothetical example to explain different issues (Gills and Thompson, 2006)

  • Global market demand

Global market demand when countries are trading together freely, they are able to benefit from the benefits brought by comparative advantage. In free trade, comparative advantage means that a country produces those goods and services that it can produce at the minimum cost given the potential that it holds. This is a result of specialization and efficiency derived with time. When trade is restricted, then specialization is limited. The loss suffered will be in form of a lack of job creation and inefficiency in the production of goods and services. When this happens the cost of producing goods increases, and so does the price, Adam smith when supporting free trade was concerned with the reason why a country would opt to produce goods that it can get from other counties more cheaply (Daly, 2007). He was of the opinion that rational human beings would otherwise concentrate on what they can produce more efficiently and imports those they can’t. let’s analyze the loss diagrammatically;

Let’s take a hypothetical case of china and Canada where Canada can produce wheat more efficiently and China can produce television sets; when there is no protection, then production is as follows

wheat Television sets
China (300-300) = 0 (300+300) = 600
Canada (1200+ 200*2.4) = 1680 (500-200) = 300
Total 1680 900

With protectionism, then the countries produce in the following way;

Wheat Television sets
China 300 300
Canada 1200 500
Total 1500 800

The net loss in the economy will (1680- 1500) = 180 weights of wheat and 100 sets of television.

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Positive externality
Figure 1. Positive externality

The local customers from either country will suffer a reduced production of goods brought about protectionism. The following graph shows how positive externalities will be created by free trade supported by strengths of absolute and comparative advantages:

Diagram 1

  • Economics

Promoters of protectionism take a mercantilist approach where they believe that international trade only benefits the country exporting. In this argument there is the physical protection of money; this happens when a country refuses to open up its borders for other countries. Promoters of the theory are of the opinion that when monies go to other countries, the profit derived from these exports accrues to the exporting country at the expense of local companies. This is not true since the money paid to exporters is likely to come back to the importing country in one way or another, it may be in form of foreign direct investments, improved standards of living, or customer satisfaction. On the other hand, it tends to assume that wealth can be measured using money that a country has; this is the wrong approach (Joseph, 2003).

One of the reasons brought about why protectionism is important is the protection of local industries. Local industries are given time to mature and compete with well-developed international companies at the same level. When this is done then local industries do not find the urgency needed to improve their processes. This makes these industries take long before they mature. Protectionism then supports inefficiency by offering a haven to the local industry. Competition is a good element in the business arena since it ensures that the quality of goods and services provided is quality; it is the one that keeps the businessmen on their toes to ensure that they earn customer loyalty. This calls for continuous improvements of its products and services. When protectionism policies have been adopted the benefits that the general population derives from the competition are reduced (Peterson & Jolibert, 1995). An example is in mobile communication in Kenya, the government had protected international trade of the mobile services providers until late 2009. The local company that was protected by the county’s laws is Safaricom, and after relaxing the laws, Zain, the company exported its services to the country. The resultant was a reduced calling rate of up to 90%. The beneficiaries are the local people, companies, and the economy in general (Craft, 2004).

  • International strategic trade policies

Nobel Prize winners Milton Friedman and Paul Krugman, when supporting the need for free trade were of the opinion that when there is free trade, and the export sector is developed in a developing country that grows with age; the result is increased employment in these countries (Griswold, 2010). The export sector will yield more foreign capital which can be invested in the different economic sectors and bring about positive change in these economies. Some of the goods that developed countries protect from entering their markets are agricultural goods, but these are the major products from developing countries, when restrictions are put, they are left to suffer. Currently, the world is suffering from a financial crisis that started in 2007; this has led to a decreased disposable income on the consumer (Schulte ,2000).

With increased protectionism, the situation will be made worse since goods costs will increase at a decreased disposable income. Living standards will deteriorate and economies will have problems recovering. If protectionism was removed, then there would have been a free flow of goods where goods and services would be produced more cheaply (Martin, 2005). It would in turn facilitate recovery from the financial crisis. Free trade would allow labor movement from one country to another; this would lead to more innovation and help in-country development. Asian countries and the United State Emirates are living examples where Saudi Arabia, Qatar, and Dubai are importing labor from developing countries like Uganda and Nigeria. With this, the economies are benefiting from cheap labor, and the employed benefit also. If there was protectionism in the movement of labor, such benefits would be lost (Bukley & Ghauri, 2004).

With the globalization of business, there is a need for developing international ethical standards and codes to apply to all companies in the world. With advances in information communication technology, it will be easy to internationalize and communicate these standards and codes (Sheila ,2004). With globalization, information can be shared and dispersed easily among nations. Innovators get a platform for borrowing ideas to assist them in their inventions. This can be from previous records where they are able to analyze them and extract useful ones. Globalization has opened countries to trade together. This has enabled people to know their rights. People are aware of the quality that they should be getting for a certain product (Moore,2009). This has been enabled by globalization. The rights of human beings have been protected by globalization and thus businesses are compelled to act ethically in this effect. Some set rules are followed by trading countries; these are rules that protect and set the way of doing business. Some set rules affect the way a certain business was conducted and thus unethical issues that had been practiced by some companies come out. An example of this is the way products are marketed, the way products are advertised, and issues about pollution. It is after globalization was taken into a place that a meeting was conducted at Copenhagen to discuss atmospheric pollution (Mol, 2003).

  • Global market competition

International trade leads to a large market of goods and services. When borders are opened and there are no trade and non-trade barriers newly developed industries will have access to a large market. When the market is large chances of their success are higher. There will be a demand for products and services in other countries which results in investment pull (Theodorus, 2006). Investment pull is where due to an increased market in a certain region, a country manufacturing the products relocates/ opens a branch in the country of demand. This is likely to benefit the country where a new factory has been established in form of increased employment opportunities and government revenue in terms of taxes to the foreign companies. On the other hand, the parent country will benefit from money earned from other areas which may be invested back in the economy. Both countries will benefit (Magee, 1976). Limited market and restrictions will lead to limited growth. Limited growth hampers development in innovation and efficiency in both concerned industries and the country.

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  • Political

Protectionism can lead to war; when countries are trading freely, they develop mutual trust and respect a factor that assists in preventing wars among them. World War 1 and World War 2 can be traced to have been triggered by trade protectionism to a certain degree. In the 18th and 19th century the British were mercantilist and protectionist, imposing tariffs among countries. This lead to American Revolution, the revolution was triggered by the oppression that Americans felt they were subjected to as a result of protectionism. After the Second World War, politicians and economists engaged themselves in vigorous planning aimed at breaking trade hindrances thus promoting interdependence (Ellis, 2000). The move was both economical and also aimed at reducing the chances of future wars. The efforts by politicians were to prevent future occurrences of war, however, protectionism has taken a different route where countries are putting barriers both tariff and non-tariff a move that is likely to cause warfare in the future. Frederic Bastiat, (30 June 1801 – 24 December 1850), a political economist said “When goods cannot cross borders, armies will.” He was trying to caution countries on the need to remove trade barriers among themselves (Richman, 2000). The need to have good interrelation among countries is forthcoming; international cooperation among countries is called for in times of war; drought, and other calamities. The situation and response by the international community can be more rapid in the case there is political stability among nations.

  • Protectionism limit the transfer of factors of production

At a free trade, factors of production are freely transferred from one country to another; this offers equal access to factors of production to both local and international users. The resultant is resource maximization.

When resources are maximized it means that the larger population’s needs will be met (Urmetzer, 2005). Technology is another factor of production that has assisted in utilizing resources better. When different levels of technology are allowed to freely move among countries, the trading countries will benefit. With protectionism, there is a protection of transfer of factors of production and thus the level of resource utilization is limited. The augment is protectionism leads to inefficient utilization of factors of production (Brouthers & Nakos, 2005).

  • It leads to the crippling of economies

Countries are blessed differently in terms of resources; these are both human and physical resources. To get what a country does not produce, then international trade is the solution; purchasing from another country will require the purchasing party to have a foreign currency of the selling country. If trade is limited through protectionism then the degree of growth is limited; for example, Philippines imports rise from rise-producing countries to feed their population (Bhagwati, 2004). If trade is limited, such a country cannot feed its population effectively. Technology and the use of computers have taken preference in the modern world, however not all countries manufacture them; they are imported in countries like China, Japan, the US, and Europe among others. When the trade of goods and services is facilitated then the world will be able to grow as a block (Leamer, (1988). The developed countries concentrated more on finished products; they get some of their raw materials from less developed countries. If trade is then limited the developed will lack raw materials while developing countries will suffer a lack of finished goods. This will cripple both economies (Balassa, 1985).

The benefits & consequences

Protectionism can be regarded as the antithesis of free trade or anti-globalization. There are numerous benefits that a country derives from globalization; the benefits include access to a wide variety of goods and services, increased employment opportunities, and improvements in health and standards of living. In a period of about twenty years, a big number of countries have entered into global economies leading to a reduction in the number of people living in poverty. When protectionism measures are adopted, these benefits of globalization will be lost or limited (Rodrik, 1992).

Limitations & restrictions

Campaigners of free trade argue that trade barriers reduce trade among countries and should therefore be abolished. Free trade agreement removes these trade barriers except the ones they deem necessary for the nation’s security. Examples of such agreements are the North American Free Trade Agreement (NAFTA), European Union (EU), South Asia Free Trade Agreement (SAFTA), Union of South American Nations, and European Free Trade Association. Free trade is a policy in a trade that enables countries to transact without government interference. Traders benefit from the trade of goods and services in accordance with their comparative or relative advantage. In a market with free trade, the prices of goods and services are determined by the forces of demand and supply; this differentiates free trade from other trade policies where prices are determined by other forces such as the government (Leamer, 1988).

Recommendations

Current economic conditions require that countries should join efforts and enhance international trade. There is a need to open one’s borders and facilitate free trade. Customs officers should not be revenue collection officers of goods imported or exported (Timmons and Hite, 2000). heir duty should be scaled down to prevention officers and control officers. They are supposed to ensure that only legitimate goods get into a country. Globalization results in mutual country benefits where each benefits party to a transaction. Each country will be enhanced to produce those goods and services which it has a comparative advantage and the result is a world full of efficiency. Free trade and globalization result in enhanced international trade with creates strong political, social and economic economies (Hill, 2011).

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Conclusion

As economies expand, international trade is on the increase. Technology has made the world a global village. Economies are joining efforts to develop an economic, political, or/and social block as they prepare to play a role in the global environment. However, countries are imposing barriers and protectionism measures aimed at protecting their economies. The trade barriers are both tariff and non-tariff barriers like trade quotas, duty/tariff imposition, visa allocations other restrictive measures undertaken by the individual government. Protectionism injures the same economies that it was meant to protect and extends to negatively affect the countries that it was put against. It leads to less market of goods and services; this reduces the rate of economic growth rate that a country has the potential to enjoy.

Protectionism is an antithesis to international trade, it denies world economies the chance to benefit fully from globalization; some of the lost benefits are customer satisfaction/choice, efficiency in the production of goods and services, political, social, and economic integrations. In the era of recession, free trade is one of the quoted solutions to the situation, however, protectionism hampers the attainment of stable economies.

References

Balassa, B. ,1985. Exports, policy choices and economic growth in developing countries after the 1973 oil shock. Journal of Development Economics,1(1), pp.23-35.

Bhagwati, J. N., 2004. In defense of globalization A Council on Foreign Relations Book Series. Oxford: Oxford University Press.

Brouthers, L. and Nakos, G., 2005. The Role of Systematic International Market Selection on Small Firms’ Export Performance. Journal of Small Business Management. 43(4),p363.

Bukley, P. and Ghauri, P. ,2004. Globalisation, Economic Geography and the Strategy of Multinational Enterprises.”Journal of International Business Studies, 35(2), p. 81

Craft, S. ,2004. International Consumer Market Segmentation Managerial Decision-Making Process. SAM Advanced Management Journal, 69(3),p. 40.

Daly,H. ,2007. Ecological Economics and Sustainable Development, Selected Essays of Herman Daly. Northampton MA: Edward Elgar Publishing

Ellis, P. ,2000. Social Ties and Foreign Market Entry. Journal of International Business Studies, 31(3), p. 443.

Gills, B. and Thompson, W. R., 2006. Globalization and global history. New York: Routledge

Griswold, D., 2010. Unions, protectionism, and U.S. competitiveness. The Cato Journal 30(1),p. 181

Hill, C., 2011. International Business: Competing in the Global Marketplace. NEW York: McGraw-Hill Irwin, New York

Joseph, S., 2003. Globalization and Its Discontents. New York: W.W. Norton & Company

Krugman, R.,1987. Is Free Trade Passe? The Journal of Economic Perspectives, 1 (2), pp. 131–144.

Leamer, E.E.,1988. Measures of openness. Chicago: The University of Chicago Press

Magee, Stephen P. ,1976. International Trade and Distortions In Factor Markets. New York: Marcel-Dekker.

Martin, W. ,2005. Why Globalization Works. London: Yale University Press.

Moore, M.,2009. Saving Globalization: Why Globalization and Democracy Offer the Best Hope for Progress, Peace and Development. New York: John Wiley and Sons

Mol ,A.,2003. Globalization and Environmental Reform: The Ecological Modernization of the Global Economy. New York: MIT Press.

Peterson, R. and Jolibert, A. ,1995). A Meta-Analysis of Country-of-Origin Effects. Journal of International Business Studies, 26(4), 883

Rodrik, D. ,1992. The limits of trade policy reform in developing countries. Journal of Economic Perspectives, 1(1), pp.87-105.

Richman, S. ,2000. Frédéric Bastiat: An Annotated Bibliography.The Library of Economics and Liberty, 1(1), p. 23.

Schulte, J. A. ,2000. Globalization: a critical introduction. New York: Palgrave Macmillan.

Sheila, L. C. ,2004. Globalization and Belonging: The Politics of Identity in a Changing World. London: Rowman & Littlefield.

Theodorus, B.,2006. Modernization and its political consequences: Weber, Mannheim, and Schumpeter. Yales: Yale University Press.

Timmons, R., and Hite, A.,2000. From modernization to globalization: perspectives on development and social change. New Jersey: Wiley-Blackwell.

Urmetzer, P.,2005. Globalization unplugged: sovereignty and the Canadian state in the twenty-first century. Toronto: University of Toronto Press.

Appendixes

Appendixes 1: main international traders

main international traders

main international traders

Appendixes 2: Most traded goods in 2009

Rank Commodity Value in US$(‘000) Date of
information
1 Mineral fuels, oils, distillation products, etc $1,658,851,456 2009
2 Electrical, electronic equipment $1,605,700,864 2009
3 Machinery, nuclear reactors, boilers, etc $1,520,199,680 2009
4 Vehicles other than railway, tramway $841,412,992 2009
5 Pharmaceutical products $416,039,840 2009
6 Optical, photo, technical, medical, etc apparatus $396,337,696 2009
7 Plastics and articles there of $386,628,064 2009
8 Pearls, precious stones, metals, coins, etc $320,174,080 2009
9 Organic chemicals $310,106,432 2009
10 Iron and steel $273,024,416 2009