Protection or Free Trade for International Trade - Essay Example

Your Prof Protection or Free Trade for International Trade The international trade policy of a country with other countries covers mainly import tariffs, import quotas, subsidies to local producers, and other administrative barriers. In a free trade system, the government does not put the importers at a disadvantage compared to the local producers whereas under a protectionist system, the government encourages local producers by having policies that discourage imports by influencing one or more of the levers of trade policy stated above. While both protectionism and free trade have their own advantages and disadvantages, the cost by far outweighs the benefits of protectionism. The arguments made in favor of protection are that the foreign producers have a “comparative advantage”, that protection helps the local infant industries flourish, that without protection importers would recklessly “dump” goods in the market, that protection protects the local producers, and finally, that protection prevents an imbalance of trade. However, each of these “perceived benefits” of protectionism comes at long-term costs which are far greater than the short-term benefits as explained below. The “comparative advantage” argument assumes that exporters from other countries have a strong competitive advantage that makes local producers less competitive thereby driving local companies out of business. For example, the labor cost in a developing country compared to that in a developed country puts some of the labor intensive local industries at a relative disadvantage. However, by moving to free-trade, countries are able to specialize in some other field where they have a comparative advantage. With such a specialization, the countries are able to take advantage of efficiencies generated from economies of scale and increased output. Also, free international trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to increased production. In the last few year, while China and India have taken up more work on the labor intensive industries, businesses in the developed countries have been able to actually take advantage of the lower cost and focus on their comparative advantage and invest more on research and development, and other high value added jobs. Besides, the comparative advantages do not last forever. Sooner or later, the advantage fades away. For example, according to Lyndesy Romick of global envision, in China labor accounted for only about 2 percent of a manufacturing company’s total costs in 2000 but 2010 it was closer to 12 percent. That protectionism helps grow the infant industries is a misplaced fallacy. Government subsidizing of a new industry may channel too many resources into that industry, and can render the industry permanently inefficient and vulnerable to competition. Besides, most infant industries are at a competition from domestic competitors and not necessarily only importers. In the last few decades, the "infant" plastics, television, and computer industries have made out very well without any protection. Next, we consider the argument of dumping. Dumping may be defined as the overflow of cheap priced goods in order to under-cut the competition and gain market share. Now, if an importer starts dumping goods in a market, it would actually be good for the customers, and for the government in terms of revenue it makes no change. The only bad effect of dumping is for local producers. Logically, no firm can enjoy “dumping” as a sustainable strategy – selling below cost in the long-term would drive them to bankruptcy. Also, according to Rothbard, “…historical investigation has not turned up a single case where predatory pricing, when tried, was successful, and there are actually very few cases where it has even been tried.” The next pro-protectionism claim that it protects local producers is also at a huge cost. By protecting the local producers, there is no incentive for them to improve efficiency, productivity and total output of goods/services. On the other hand, increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods. As a result, both the consumers and government have more to gain. An example of this is clear by looking at the automotive industry in the US. For years, the big three (GM, Ford, and Chrysler) had protection for the auto industry. But once the Toyotas and the Hondas arrived, the local producers also got more product and customer service oriented. In the end, it was the consumer and the government who benefited with better products and higher auto sales. Finally, the argument of the proponents for protectionism that it prevents trade imbalance is also misplaced. While it is true that free-trade may cause higher imports than exports but this is not necessarily a bad thing. In the US for example, imports have exceeded exports regularly for the last many years. But, this "deficit" has been accompanied by large amounts of foreigners investing: in real estate, capital goods, U.S. securities, and bank accounts. Not only does protectionism have less benefit than cost, free-trade also has some other benefits that are not possible to get with protectionism. The foremost of these is consumer benefit. As an example, “in Australia imported motor vehicles would cost 35% more if the 1998 tariff levels still applied. Clothing and footwear would also cost around 24% more” (Edge K). Free-trade is definitely the way forward for the global economy. Not only does it strengthen the countries encouraging free-trade, it also expands the global economy as a whole. A typical example for this is India. Since 1991 when India moved from a closed protectionist economy to deregulation, it has experienced much higher GDP growth and has been able to develop much faster than before 1991. Not only has this growth brought positive results for India, but also for other importers in India who have been able to develop and expand the global market for their products. The countries involved in free trade have experienced rising living standards, increased real incomes and higher rates of economic growth. Clearly, free-trade is a much better option than protectionism. References Edge, K. Free trade and protection: advantages and disadvantages of free trade. Accessed 2 June 2011. http://hsc.csu.edu.au/economics/global_economy/tut7/Tutorial7.html Douglas, FCR. Protection or Free Trade: An Examination of the Tariff Question with Especial Regard to the Interests of Labor. Abridgement of Original 1886 edition by George Henry. Accessed 2 June 2011. http://www.truefreetrade.org/pftindex.htm Lyndsey, Romick. When Profit isn’t made in China. June 7, 2010. Global Envision. Accessed 2 June 2011. http://www.globalenvision.org/topics/trade Rothabrd, Murray N. Protectionism and the Destruction of Prosperity. Accessed 2 June 2011. http://mises.org/rothbard/protectionism.asp Shah, Anup. Deregulation or Protectionism? Global Issues. Accessed 2 June 2011. http://www.globalissues.org/article/43/deregulation-or-protectionism Read More