Reasons Why Governments Place Restrictions to Free Trade - Essay Example

Reasons Why Governments Place Restrictions to Free Trade Students Name: Learning Institution: Abstract International trade is important and beneficial for numerous reasons. For instance, free trade based on comparative advantage enhances a country’s wellbeing. Despite the several benefits of international trade, nations have imposed restrictions such as tariffs, non-tariff barriers and import quotas. Proponents of government intervention in international trade argue that international trade hinders infant industries from achieving their full potential. Other valid arguments by proponents of international trade restrictions include; protection of jobs, cultural considerations, political reasons among others. Even though the world, since World War Two, has witnessed great reductions in trade barriers, nations everywhere continue to restrict free trade. This essay discusses the political, economic and cultural motives behind government intervention in trade. Introduction Trade restrictions are barriers placed by governments to protect domestic firms or industries from foreign competition by using either tariffs or non-tariff barriers. A tariff is a tax imposed on imports by the importing country as the goods cross its international boundary (Hindley, 1994). Since World War II, there has been a series of “rounds” or negotiations to reduce barriers to international trade. These multilateral negotiations played a crucial role of lowering trade barriers. In 1947, the General Agreement on Tariff and Trade (GATT) was formed to regulate international trade and to enhance reduction to trade restrictions among member states (Hindley, 1994). Subsequent rounds of GATT took place in 1960s, 1970s and 1980s, leading to a significant decline in trade restrictions among the member states. This agreement was replaced in 1995 by the World Trade Organization (WTO) following the Uruguay Round that took place in 1994 (World Trade Organization, 1998). Other trade agreements that were established with a view of enhancing trade among member states include the NAFTA, European Union and Asia-Pacific Economic group. The American Free Trade Agreement (NAFTA) was meant to lower trade restrictions between the United States, Mexico and Canada. The European Union was established by European nations to eliminate trade restrictions among them. The Asia-Pacific Economic group (APEC) was formed in order to reduce trade restrictions among East Asian nations. In all trade agreements established globally, members agree to the fact that free trade supports prosperity for all. Despite this, governments have continued to restrict free trade for different reasons (Farabi, 2012). This paper examines the economic, political and cultural motives behind government intervention in international trade. Economic Motives Behind Government Intervention in International Trade There are various economic reasons that influence governments to restrict trade. One commonly accepted argument is the infant industry argument. This argument supports the case for free trade but contends that it is vital for countries to place temporary trade barriers to shield local and emerging industries from stiff global competition (Farabi, 2012). Otherwise, if allowed, large foreign companies are likely to drive out emerging domestic firms from the market, as they are more established and efficient. Researchers argue that the bans should be lifted after the emerging domestic companies become efficient and are able to compete in the market with the foreign producers. However, as (Farabi, 2012) explains, this argument is highly dynamic in nature, given that it does not give a specific timeline within which trade barriers should exist or when restrictions should cease to exist. This creates a level playing field within which governments provide protection to domestic industries for prolonged periods of time. According to Farabi (2012), this argument is often advanced by underdeveloped and developing nations which have comparatively outdated industries. It has been applied in varying degrees in African, South American and Asian countries, inspired by the Infant Industry Protection Act that was implemented in Japan after World War II. Another economic reason for placing trade barriers is the desire to protect jobs in the domestic market that could be lost as a result of competition from imported products. This mainly occurs when domestic consumers opt for imported products in place of domestically produced products, leading to a decline in the level of domestic production. The decline in domestic production often leads to a decline in domestic employment (Schmidt et al, 2011). Also, this may occur in case the free trade allows domestic producers to shift production facilities to foreign countries in order to maximize cost of production. This may lead to loss of jobs or higher unemployment rates in the domestic market. Protectionists argue that production should be carried out by citizens of a nation, who have voting rights and pay taxes, rather than foreign employees. This argument has been used by most US labor leaders to reject free trade, and, in turn, force the government to impose trade restrictions. Governments also provide barriers to international trade in order to protect domestic industries from unfair trade. According to Ikenson (2010), some governments provide subsidies and other incentives to domestic producers in order to ensure fair play in competition between local companies and foreign companies. In countries where no such incentives are provided to domestic firms, imports tend to be cheaper compared to locally-produced goods. This may be beneficial to consumers in importing nations but often hurts the sales of local products that are similar to the imports. Another practice that may be considered as unfair trade is dumping. Dumping refers to a situation whereby a company exports a product at a lower price (Hindley 1994). It is prohibited under domestic laws in most countries because it hurts domestic firms and workers. According to (Hindley, 1994), predatory dumping occur in instances where foreign companies use dumping to drive domestic companies out of business, reduce competition, establish a monopoly or to increase market share. These functions are against an importing country’s economic welfare and interest. A good example of a move to protect domestic industries from unfair trade was the action taken by the United States in 1998 to protect the domestic steel industry from cheap import from Japan (Prusa, 2005). The US courts passed four anti-dumping and anti-circumvention suits against the importation of Japanese steel products (hot-rolled steel, stainless sheet strip in coils, corrosion-resistant steel, stainless steel round wires). A survey conducted by Prusa (2005) indicated that both USA and European Union have retained anti-dumping rules and have often applied them to protect their key industries from the impact of importers. Protection of wages in domestic markets from being downgraded has been highlighted as a substantial economic reason for placing restrictions to free trade. Some governments advancing protectionist policies argue that imports from nations with cheap labor put a downward pressure on the cost of labor in their domestic markets. For instance, the cost of labor is relatively low in Asian, African and South American nations (Lipsey & Harbury, 1992). This implies that producers in those nations have a comparative advantage over producers in other regions such as North America and Europe due to the low wages paid to laborers. This comparative advantage may be as a result of incentives such as subsidies provided to producers by national local governments or due to the economic structure of these countries (Lipsey & Harbury, 1992). Imports from these countries are relatively cheap and hence, governments place restrictions to prevent them from undercutting domestic production. For instance, with increased trade liberalization over the last three decades, real wages of workers in the US grew more slowly and the gap between wages of less skilled and skilled workers rose sharply. Workers in the US and Australia are paid much higher wages compared to workers in countries such as China, Czech Republic and Mexico (Farabi, 2012). Thus, it is difficult for producers in the US and Austria to compete with producers in China, Czech Republic and Mexico. Unless the US and Austria place trade barriers to imports from these countries, domestic production and employment, is likely to reduce. According to Arnold (2010), governments also place trade restrictions to countries that fail to abide by certain internationally established rules or rules established between trading partners. The rules and regulations imposed by the government may give domestic producers an unfair advantage over foreign competitors. In response, foreign governments may impose restrictions that offset the foreign advantages, hence creating a level playing field on which the domestic and foreign firms can compete on equal terms. Pollution is highly discouraged in the US, and this acts as incentives for local firms. Sometimes, foreign governments feel that the intervention by US government provides local firms with an unfair competitive advantage over foreign firms in the same industries. This may lead to retaliation by foreign governments in terms of trade restrictions (Farabi, 2012). Political Reasons Behind Government Intervention in International Trade Governments also restrict trade for specific political reasons. One of the reasons given is to protect national security or to protect industries that are perceived to be tactically important for the purpose defending national security. Usually, governments offer significant protection to defense industries as they view them to be crucial to national interests. For instance, both the US and Western Europe offer much protection to their respective defense industries (Bernanke, 2003). Governments, especially in developed nations also restrict free trade in military technology. According to Bernanke (2003), they support the move to place barriers to trade in military technology by stating that allowing it would lead to a transfer of high-tech military equipments to nations that may become strategic opponents in the future. The government of US advances this argument to be a reason of restricting free trade in military technology. They argue that the Chinese economy, for instance, has been growing at a high rate and thus, it is likely for this country to become a strategic opponent of the US in the near future. According to Carbaugh (2010), protectionist governments also argue that a nation might be put in jeopardy in case of war or international crisis if it depends heavily on imported products. On this view, they suggest that trade barriers should be put in place to ensure the existence of domestic producers, even though they may not be comparatively efficient. This argument is often advanced by major oil-importing countries. Since early 1970s, several Arab countries imposed oil boycotts on various nations from the west to gain the military support during the Middle East conflict (Choi & Hartigan, 2008). Cultural Motives Behind Government Intervention in International Trade Other countries place trade restrictions based on cultural considerations. Governments provide restrictions to products that they consider unacceptable or harmful (Farabi, 2012). A nation may decide to place restrictions on fish products imports in order to preserve domestic small-scale fishing. Governments place restrictions and prohibitions to narcotics that are considered to be harmful to human beings when consumed. Often, the governments give legitimate reasons for placing such barriers. For example, Russian regulatory authorities recently placed a ban on beef imports from Europe Union after a virus known as Schmallenberg spread across Europe (Farabi, 2012). Conclusion Though there has been a series of negotiations that have led to a substantial reduction in trade restrictions among countries since World War II, some forms of restrictions have always existed. There are various economic, political and cultural reasons that influence governments to intervene. The economic arguments advanced include; protection of emerging domestic firms and industries from foreign competition; the need to protect jobs in the domestic market; protection of domestic industries from unfair trade, protection of wages in domestic markets from being downgraded and retaliation reasons. Political reasons include the need to protect national security or to protect industries that are considered to be vital for the purpose of defending national security and to protect a nation from getting into a jeopardy during times of war or international crisis. Finally, governments restrict trade to protect citizens from foreign products that could adversely affect their welfare or that could be harmful to them. References Arnold, R. (2010). Microeconomics [With Access Code]. London: Cengage Learning. Bernanke, B. (2003). Principles of Microeconomics. Oxford: Blackwell publishing Ltd. Carbaugh, R. J. (2010). Contemporary Economics: An Applications Approach. London: M.E. Sharpe. Choi, K. & Hartigan, J. C. (2008). Handbook of International Trade: Economic and Legal Analyses of Trade Policy and Institutions, Volume 2. New York: John Wiley & Sons. Farabi, Y. (2012). What are the reasons for governments to restrict free trade? Are these valid in the 21st century?. Munich: GRIN Verlag. Hindley, B. (1994). The contingent protection after the Uruguay Round: safeguards, VERs and anti dumping action. Paris: OECD. Ikenson, D. (2010). Protection made to order Domestic Industry’s Capture and Reconfiguration of U.S. Antidumping Policy. 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