Debate on Free Trade vs Protectionism - Literature review Example

Institution : xxxxxxxxxxx Title : xxxxxxxxxxx Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2012 Introduction One of the dominant and longstanding global economic debates of all time has often been the issue of free trade versus protectionism. According to Barrows & Smithin (2009), the debate can be traced back to the earliest days of capitalism whereby classical economists and mercantilist economists contended on the issue. The classical economists argued that the government should not impose various regulations and restrictions on trade such as excise taxes and tariff barriers. On the other hand, mercantilist economies argued that protectionism is vital in the sense that the government should enforce restrictions on trade. This particular debate lingers on even in the contemporary business environment. In deed both free trade and protectionism can bring about diverse benefits to a nation, however, the big question concerning the two policy approaches is whether free trade is a much more beneficial policy as opposed to protectionism or whether protectionism is much more beneficial as opposed to free trade. This particular paper seeks to provide an in-depth analysis of the debate. The scope of the analysis will be grounded on foremost evaluating the benefits of both approaches and weighing them against each other. According to Froning (2000) the adoption free trade can be argued to be a beneficial policy approach to nation based on the fact that it can facilitate enhanced economic growth. Froning (2000) highlights that; the relation between the free trade policy and economic prosperity is without a doubt strong and suggestive. This is because freer trade from regulations, restrictions and reduced tariffs permits various nations, people and regions to specialize on producing what they can do best, to take advantage of the economies of large scale production in addition to buying more cheaply those goods that others do best. Therefore, by fostering or promoting opportunities for businesses, freer trade recompenses risk-taking by enhancing sales, profit margins in addition to market shares. As highlighted by Tucker (2000), various firms can decide to exploit those profits by expanding their business operations, joining new market sectors, in addition to creating better paying jobs. Producers from various nations are thus able to fully exploit areas in which they have a comparative advantage over other foreign producers and by minimizing their real costs. For instance a study conducted by Rodrik (2006) to examine what makes China a special economy reveals that the Chinese government policies have greatly assisted in nurturing the economic growth of the country. According Rodrik (2006) the free market policy approach has played a significant role is making China an export basket that has recorded an increase in economic growth. Since the 1990’s the Chinese government has encouraged free trade through progressively reducing tariffs. In addition, the Chinese government also naturalized the impact of tariffs on exports through the introduction of duty drawbacks and other incentives. Furthermore foreign investors are also freely allowed to form joint ventures in China; they can also transfer their technology to local partners without restriction. Consequently, Rodrik (2006) argues that adoption of a free market approach in China has greatly influenced the increased economic growth of China. On the other hand an argument supporting protectionism is that a protectionist trading policy is well-suited with the aim of improving the national income. According to Dodd & Hasek (2002), the most cited argument in favour of this is the infant industry argument. This argument is based on the view point that through time, dynamic learning effects will enable or allow any particular industry that is not presently competitive to realize comparative advantage after an impermanent protection period. According to Ghimire (2012) most industries in the developing nations are at the infancy stage and cannot therefore compete with the industries of the industrially developed nations. Therefore, if the free trade policy is embraced, then they are likely to die out while still at the infancy stage. In this case, industrial development cannot be achieved within the underdeveloped nations. Therefore, according to Ghimire (2012), advocates of the protectionist policy argue that in order to contribute equally to the industrial development of all nations globally, a protectionist policy would be the best at an initial policy of development. This means that industries in unindustrialized (developing) countries can only effectively compete with those that have already developed if they get some initial protection from their respective governments in the form of subsidies. Dodd & Hasek (2002) argues that by protecting a particular industry from external competition, it will be able to learn and thereafter obtain skills that will eventually minimize costs, as a result gaining comparative advantage. In my opinion, I think that when it comes to enhancing economic growth and national income both free trade and protectionism are actually beneficial within the same level. Alternatively, advocates of the free trade policy have, on the other hand, criticized the infant industry argument arguing that the protection trade policy has distorted investment in addition to leading to the misallocation of capital away from their natural homes. According to Edmund (2002), a number of those advocating for the free trade policy have argued that this may be particularly detrimental to new nations where capital is scarce. Additionally, they have also proposed that there cannot be such a thing as temporary protection since such a policy would only generate vested interests who would only want to sustain their own fiscal privileges by means of fraudulent political means. The special interest groups normally include unions, companies and farmers’ groups who would always charge higher prices and get higher wages than they could expect in the case of a free marketplace. These special interest groups normally have a lot of money and political power to influence politicians in order to pass laws favourable to them. Politicians in turn take the advantage of uninformed supporters to rally support for these particular laws. According to Luger (2003), proponents of free trade have also argued that the adoption free trade is a beneficial policy approach to nation on the grounds that it increases production and efficiency. Luger (2003)highlights that such advocates have always argued that nations that specialize in producing commodities or goods where they have a comparative advantage are able to increase their production rather than focusing on industries or goods in which other nations have a comparative advantage. With specialization on the resourceful sectors, a large national product is attained; a large exportable surplus produced and a large volume of goods and services according to the nation’s requirements can be imported from other nations at lower prices. Additionally, Luger (2003) argues that such advocates contend that by increasing production, such nations enhance their efficiency. This is because, by specializing, such nations better allocate their resources in addition to purchasing cheaper resources from other nations. On the other hand, advocates of protection policy argue that the adoption of this policy helps to create a balance of trade by being able to protect both the goods and services produced by a nation from that of other nations. Ghimire (2012) highlights, for instance, that underdeveloped nations such as Nepal have more often than not encountered an adverse situation in as far as the balance of trade is concerned. As a result, proponents of this policy argue that in order to encourage exports and discourage imports, high custom duties ought to be imposed on imports and subsidize exports. In this way, Uhlhaas (2003) argues that advocates of the protection policy claim that the protectionist policy minimizes imports while encouraging exports, a factor they contend enhances the balance of trade situation In my viewpoint, however, I think in terms of enhancing production and efficiency the free trade policy works best. The is because the protectionist policy on trade can only work within the short run in as far as creating a balance of trade is concerned. However, in the long run, the policy only does the opposite of its intentions as it is able to make the nation and the industries it is intending to protect be less competitive within the international market place. Another argument that has often been raised by those advocating for free trade is based on the fact that the adoption of the free trade policy promotes innovation and competition. As Froning (2000), highlights, advocates of this policy have often contended that the policy fosters competition, a factor that spurs firms to innovate as well as create better products. In this way, firms produce as well as bring more goods and services to the market, making prices of such goods and services low and quality high so as to retain their respective market share. Other than spurring competition, the free trade policy has also been argued to promote innovation. The free trade policy is argued to promote innovation because, other than the exchange of goods and services, the flow of trade encourages new ideas. Since firms have to compete with their foreign counterparts, they are force to take notice of the failures and the successes of their counterparts within the international marketplace. According to Froning (2000), for instance, the United States market has proven continually, especially over the past decade that competition initiates or spurs increasing innovation. The United State’s greatest advantage has often lied on its capability to innovate as well as develop that continually growing knowledge base. This is clear, for instance, in the strong competition by a number of American firms working to come up with the up-to-date personal computers, provided at the lowest cost possible. With growth in the electronic business have come unrestricted choices of goods and services, in addition to lower prices for various products. According to Froning (2000), the United States is known to be “innovational complex”. It has thousands of engineers, venture capitalists and entrepreneurs that are unrivaled anywhere in the world. This significant resource has enabled it to produce an ever-increasing number of new goods and services that has bolstered its competitive advantage within the international market. On the other hand, proponents of the protectionist trade policy have supported protectionism arguing that it allows for the diversification of industries. As Ghimire (2012) highlights, advocates of this policy argue that it is at the best interest of various nations to be able to secure their respective economies against any global economic disruption by going for a equally balanced growth and for a reasonable degree of self-reliance. This can be attained by embracing tariff protection to the various sectors that have the potential to attain a reasonable growth level. According to Ghimire (2012), they thus criticize the free trade policy arguing that under this policy most nations specialize on a narrow range of industries in addition to depending on foreign nations for the rest of their requirements. Further, they argue that such a policy cannot be effective and desirable should there be economic groupism, depression, political/economic rivalry and war among the trading partners. They therefore contend that this can adversely affect the economies of the economically-dependent nations. As a result, they claim that a protectionist policy is the best as it helps in diversifying industries. The free trade policy has also received significant support from its supporters on grounds that it promotes democratic values by promoting support for the rule of law. As highlighted by Froning (2000), companies or firms that participate in the global trade often have a reason to adhere to the various terms of their respective contracts as well as the international norms or laws that have been agreed upon. Seymour (2012), for instance, argues that the World Trade Organization often requires its member nations to honour trade agreements and, in case of any dispute, to follow the decisions made by its mediating body. By promoting support for the rule of law, the free trade policy is also argued to reduce cases of corruption. Froning (2000) argues that in nations where such contracts are not imposed, overseas investments flee, capital stays away and business relationships fail. It therefore turns out to be a descending spiral that, in particular, hampers economic growth in nations where corruption of various officials is rampant. On the other hand, protectionists argue that free trade challenges local policies for social good. According to Fletcher & Bernstein (2010),those supporting the protectionist policy contend that a large number of developed governments have for a longtime held the idea that free trade encourages social evils that hurt citizens of other nations. As a result, in order to protect its citizens, governments ought to enact laws that restrict what firms can as well as what they cannot do in the hunt for profit. As Tiefenbrun (2000) highlights, for instance, various protesters consisting of trade unionists, environmentalists and some anarchists opposed to the free trade policy have often disrupted the WTO conferences from being organized. The protesters have often fought to protect the alleged victims of free trade (the developing nations). Wapner et.al (2000) argues that some multinational firms have often used these victims to their financial advantage in the name of free trade and in compliance with their corporate duty of profit maximization. Conclusion The debate over free trade versus protectionism is probably endless and never changing as revealed in the analysis above. What appear to be changing are possibly the contours of where to draw the line and what is satisfactory. How much of protectionism as well as how much of free trade is not an easy question. However, in my own viewpoint, I feel that the free trade policy is a better way in terms of attaining economic and social development as compared to the protectionist policy. Both free trade and protectionism can bring about diverse benefits to a nation as highlighted in the paper, however, I am of the opinion that those advocating for the protectionist policy of trade have no very strong points. Protectionism seems to be only beneficial in fewer cases, but generally it leads to many problems. Besides, I feel that most of the problems relating to free trade do exist due to protectionist barriers set up by some nations, as a result, interfering with the real free trade system and thus act as a disadvantage for the developing nations in particular. References Barrows, D and Smithin, J, 2009, Fundamentals of Economics for Business, World Scientific. Dodd, J.H and Hasek, C.W, 2002, Economics: Principles and Applications, Goodwill Trading Co., Inc. Edmund, R, 2004, Free Trade versus Protectionism: New South Wales, Victoria and the Tariff Debate in Britain, 1881-1900. Froning, D.H, 2000, The Benefits of Free Trade: A Guide for Policymakers, Retrieved on 3rd November, 2012 from Fletcher, I & Bernstein, W, 2010, Debating Free Trade vs. Protectionism Ghimire, R, 2012, A Course in Basic Economic Theory, Ramesh Ghimire Publishers. Luger, E, 2003, Free Trade versus Fair Trade, GRIN Verlag. Rodrik, D, 2006, What’s so Special about China’s Exports? Working Paper 11947, National Bureau of Economic Research, Retrieved on 3rd November, 2012 from Seymour, 2012, A Balanced View of Trade: Why the Bahamas must Rethink WTO Membership, The Nassau Guradian, Retrieved on 3rd November, 2012 from Tiefenbrun, S, 2000, Free Trade and Protectionism, The Semiotics of Seattle. Tucker, I.B, 2010, Macroeconomics for Today, Cengage Learning. Uhlhaas, A, 2003, What are the Main Advantages and Disadvantages of Global Free Trade? Does it exist in Practice? GRIN Verlag. Wapner, P.K, Ruiz, L.E & Falk.R.A, 2000, Principled World Politics: The Challenge of Normative International Relations, Rowman & Littlefield. Read More