Free Trade and Protectionism - Essay Example

? FREE TRADE AND PROTECTIONISM Macro and Micro Economics Outline Introduction Advantages of Free International Trade Negative Effects of Free Trade and Protectionism Conclusion References Introduction Discussions trying to figure out what is the best: the policy of protectionism, which leads to the development of national industry, or free trade, which allows directly to compare national costs of production with international indicators, have become a subject of centuries-old dispute among economists and politicians. Hence, two years ago, 44 percent of Americans were against free trade meanwhile other countries showed absolutely opposite statistics (The Economist 13 Oct 2011). During different periods of the world history, foreign trade practice changed preferences from one direction to another without a firm acceptance of any of the mentioned extreme forms. In the mid-1960s, the international economy was prone to step away from protectionism and support more economical liberalisation; meanwhile during the next decade, quite an opposite tendency took place and various countries started to shut off from one another with the help of tariff and especially non-tariff barriers in order to secure their own inner market from foreign competition. Today’s conditions of tough competition stimulate governmental representatives to take the question of the state’s foreign-economic activity and its forms more seriously, making the right choice between two different policies that are able to exert influence on every area of government’s life. Advantages of Free International Trade The liberalisation of international economic relationships necessitates the transition to open economy having an antimonopoly character. As a rule, a lot of states are interested simultaneously in both liberalisation and protectionism. The theoretic justification of free trade policy, which is considered to be profitable for all states and nations, was formed by Adam Smith, Davis Ricardo, Francois Quesnay and others (Dunkley 2004). The movement of free trade proponents was founded in the last quarter of the 18th century in England, and it was connected with the industrial revolution. The position of English free traders was directed against agrarian duties, which supported high prices for farm commodities in the interest of large landowners (Schumacher 2012). In this respect, under the influence of customs reform, the free trade policy completely won in Great Britain in the mid-19th century and later on, the tendency and idea of free markets spread in France, Germany and Russia (Irwin 2009). In the 20th century, the principles of liberalisation were put into practice based on the performance of international organisations and regional economic unions. The policy of free trade supposes minimal governmental interference in foreign trade, which develops on a basis of free market forces of demand and supply. The main methods of free trade are dumping, which means sales of products at artificially decreased prices, and non-tariff ways of regulation, which include reviewing and standardisation. The advantages of free trade are multifaceted and have been proved with theoretical aspects as well as practical results. First of all, free trade allows improving prosperity of trading nations because it opens opportunities for international specialisation of production and exchange based on the principle of comparative advantages. The gains of international trade can be measured with the difference between profits received in the conditions of international exchange and financial results obtained with the lack of foreign trade or, as Marshall suggested, comparative analysis of producers’ and consumers’ profit levels may also evaluate benefits of free trade policy. Secondly, such foreign economic attitude mitigates the development of competition and stimulates innovations. Finally, all these consequences contribute to the improvement of product quality, which is a positive aspect for potential consumers. Thirdly, free trade offers opportunity for market expansion and international concentration of production and mass output of those goods that are profitable for consumers. And lastly, free trade serves as a basis for optimisation of distribution of manufacturing resources among states and such international combination of them that manages significantly to increase effectiveness of their utilisation. The recommendations of free trade proponents stipulated economic growth and prosperity of many countries directed to the way of open economy (Adams 2003). Diagram 1. Factor Inputs and Real GDP - AUS (percentage deviation from base) Hence, according to the presented diagram, ‘cuts in protection lead to increased levels of real GDP’ (Adams 2003, p. 3). The examples of free trade agreements can be the European Union, North American Free Trade Agreements, General Agreement of Tariffs and Trade, ASEAN Free Trade Area, Asia-Pacific Free Trade agreement, Trans-Pacific Partnership, Greater Arab Free Trade Area and many others. Also, theoretical benefits of free trade policy can be easily proved with the help of simple economic analysis based on the law of supply and demand and the economic effects of a tax, which is presented in diagram 2 (Fouda 2012, p. 353). There, it is prominent how with the change of price under the influence of tariff restrictions, society suffers losses and a number of import products dramatically reduce. Diagram 2. Economic Analysis of Supply and Demand Usually the most attractive benefits of free international trade are existence and availability of large markets. Proponents of such policy assert that suppliers receive a real opportunity for getting big growth and higher profits along with investments and offering a significant number of job positions (Klimasinska 2013). These aspects are extremely important for poor countries, where economic opportunities for employment are limited. At the same time, in the conditions of free markets, consumers receive unconstrained access to those products that can be unavailable in the national market. It is fair to state that there are a lot of successful examples of those countries that strive for globalisation and expect to gain a lot of potential trade agreements. Hence in 1998, Korea started negotiations with Chile regarding a free trade agreement and in 2001, China joined the WTO (Urata & Kiyota 2005, p. 219). According to Kelleher (2013), the new Shanghai’s free-trade zone instils huge hopes for enhancing investments, providing more control over fund distribution and eliminating barriers that divide the country from global markets. UK Prime Minister David Cameron commented the EU–US negotiations regarding trade agreement with positive forecast stating that ‘The deal will inject ?1.3bn to the UK economy, boost exports by almost a third and create thousands of new jobs’ (cited in Chaffin 2013). Regional trade agreements between the NAFTA members and other countries have managed to raise sales of fruits and vegetables by 2 per cent per year (The Economist 22 Dec 2013). More than twenty members of the Asia-Pacific Economic Co-operation (APEC) summit held in Vladivostok agreed to decrease tariffs on 54 categories of goods (The Economist 22 Sept 2013). The process of globalisation provided Britain with easy credit and generous welfare (The Economist 2012). Due to Petri and Plummer (2012, p. 8), ‘The United States is estimated to gain $78 billion annually on the TPP track and $267 billion with regionwide free trade’. South–South agreements have managed to cut the tariffs and raise the share by 64 per cent (Fulponi, Shearer & Almeida 2011). The study of Jin, Koo and Sul (2006, p. 70) revealed that free trade agreements stimulate trade under the influence of trade diversion; therefore, for example, under the NEAFTA, Korea showed the highest raise in GDP, exports and welfare. Finally, analysing the experience of different countries, it is fair to summarise the main benefits of free trade. Hence, according to Froning (2000), free trade provides the following: promotion of innovations; generation of economic growth; dissemination of democratic values; and development of economic freedom. Negative Effects of Free Trade and Protectionism Despite the fact that free trade among countries has noticeable benefits, there are also some disadvantages that may force states to implement protectionist measures. The first negative effect is excessive specialisation, which helps other countries achieve higher effectiveness in a specific industry. For example, superiority of Japan in the production of motorbikes led to the drop of analogical production in Europe. Scientific and technological advance may necessitate the development of a highly competitive substitute product. When a country loses an important market of export, it gets into quite a complicated situation since factories and plants that have been built for the production of specific products are impossible to use for another industry without reorganisation. The same happens with employees who have been trained for work in a specific industry. In order to compete in global markets, frequently companies cut costs at the expense of low salaries and poor working conditions. Due to these measures, employees suffer a lot switching places of the work and influencing the national labour market. It is also concluded that to reduce costs, countries are prone to ignore environmental standards, which leads to environmental damage. A lot of people consider that open markets may result in a loss of job since employers get an opportunity to hire cheaper labour (The Economist 10 Sept 2013). Some specialists, who criticise NAFTA, strongly believe that free trade agreements can cause union opposition, which may weaken government regulation. Taking this into account, many countries still prefer protectionism as a leading government policy. Hence since 2008, the G20 major economies have implemented more than 1,500 protectionist measures; currently on average, every month brings about 10 new measures (Donnan 2013). Protectionism is a governmental economic policy that aims at the support of a national economy and its protection from foreign competition. For example, in Japan, high tariffs on rice imports of about 800 percent and considerable subsidies help local farmers survive in the market (The Economist 29 Oct 2011). Protectionist measures are tariffs, import quotas, subsidies and temporary import bans (Kiloe 2009). Other forms of protectionism can be a government bailout of domestic companies, export credits and financing of state-owned banks; hence, loan guarantee to PSA Peugeot Citroen harms foreign competitors, which is why it can be easily called as a protectionist measure (The Economist 12 Oct 2013). Specific markets of the United States also use protectionist measures even against inner segment’s competition; for example, there is a strict policy of professional licensing requirements that prevent barbers, lawyers, doctors and taxi drivers from working in those states that they have not been licenced (Poole 2004). Proponents of protectionism policy offer socio-political arguments, which are the following: 1. Support of a country’s government security, which will suffer from loose specialisation of the economy in case of refusal from protectionist measures; 2. Security of higher living standards and salary levels in a country since wealthy countries protect themselves from cheap labour and less costly products; 3. Support of some traditional types of performance, for example peasantry; 4. Achievement of specific political goals with other countries, for example sanctions against Serbia in order to make its government change attitude regarding Bosnia. Economic arguments in a defence of protectionism are chiefly focused on maximisation of real profits that can be gained with the help of protectionist measures. First of all, import duties improve conditions of trade and the country is able to increase economical win. However, it is possible only when the demand on a product is more elastic than its supply, so the price growth will affect mainly a producer and the profit of duty will supplement the state budget. In addition, for the effectiveness of this measure, it is imperative to make sure that an exporting nation does not have opportunity to enter other markets and its production factors cannot be used for the production of alternative goods. Secondly, protectionist measures provide support of the national economy in the stage of its formation as it has been proved by some historic events. Thirdly, this policy plays a great role in growth of the employment rate of national resources since it is able to increase aggregate demand on products of national producers. The forth argument in defence of protectionism is connected with an attempt to extenuate crisis in those industries that suffer from economic difficulties. A bright example of such situation can be the cotton industry of England in the 1970s. Moreover, protectionist measures may be implemented in order to secure a country from a global crisis. The fifth argument includes such exceptional cases as a crisis of balance of payment, setting tariffs in response to restrictive measures of another state, protection of national producers from ‘unfair’ foreign competitors etc. There are a lot of examples of protectionist measures in different countries. For instance, Japan constantly blocks its market of automobiles from American cars (Politi 2013). According to Fratzscher (2013), the EU countries are not willing to compromise trade liberalisation of agricultural products as much as the US does not wish to cut tariffs, while the cooperation of these two leading blocs is supposed to cause an impending increase of red tape. Despite numerous attempts of the US to generate market-opening reforms, India implements protectionism policy saving the status of a nuclear pariah (Kazmin 2013). America blocks Chinese paper clips in the national market with a 127 percent tariff while Japan puts a 778 percent on rice (The Economist 12 Oct 2013). Quite an ambiguous position can be seen in the attitude of Great Britain, which Prime Minister David Cameron supports globalisation in every area except for the labour market that he wishes to secure from foreign employees (Ganesh 2013). The Prime Minister wants to limit the immigration rate, which totally contradicts the principles of free trade policy and has no better name for it as ‘protectionism’. In Taiwan, a significant part of its population considers that opening of national markets will demolish small Taiwanese businesses (The Economist 13 Jul 2013). Another appropriate example of a country that actively uses protectionist measures is Russia, where the president with increasing subsidies for farmers wishes to protect national markets from external competition (The Economist 30 Jun 2013). However, despite all positive aspects of protectionism, it is fair to state that reciprocal tariffs can increase intensity in economic relationships between countries and lead to trade wars. Conclusion It has been proved that free trade serves for long-term interests and justifies global conclusions of open markets, while protectionism works under the pressure of circumstances and brings success only in short-term perspectives of a country. In this respect, it is always suggested to decide which policy is more preferable for the state for a specific period of time, but not for permanent implementation. References Adams, PD 2003, The effects of a free trade agreement between Australia and the USA with special reference to the Victorian economy: main report, Centre of Policy Studies, Australia. Chaffin, J 2013, ‘EU and Canada agree on trade pact’, Financial Times, 18 Oct, viewed 22 December 2013, via Financial Times database. Donnan, S 2013, ‘Trade: into uncharted waters’, Financial Times, 24 Oct, viewed 24 December 2013, via Financial Times database. Dunkley, G 2004, Free trade: myth, reality and alternatives, Zed Books Ltd., London. 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