Free Trade vs. Protectionism - Term Paper Example

 Free Trade vs. Protectionism Introduction: Free trade is the term used for the policy in which the government does not interfere in the trade by imposing any tariffs or subsidiaries. This policy is developed to ensure that the trading parties are able to gain full advantage from the trade. Under this policy the resource allocation is solely determined by the prices that emerge from supply and demand. On the other hand, the other trading policies allow the allocation of resources among the trading countries to be according to the pricing strategies emerged by deregulation. The government imposes protectionist policies due to which the prices are adjusted and several supply restrictions might be made. The government intervention in the market and in the supply of the goods and services provided to the customers can either increase or decrease the costs of goods for the customers and well as for the producers. Many of the governments since the 20th century have reduced the policies of tariffs, quotas, legislations, government interventions and other barriers on international trade which eventually result in artificial prices on goods. The economic policy under which the government imposes tariffs and subsidiaries on the goods and restrains trade through these policies is called protectionism. A variety of policies are imposed by the government including legislative controls due to which the imported goods and the goods produced domestically can have fair competition. Protectionism and free trade are contrasting policies that differ from each other because in one of the policies the government restricts trade and in the other the government minimizes the barriers on free trade. In the recent years, the protectionism policy is known as the alignment of anti-globalization since it enforces the nations to be restricted to freely trade with the foreign nations. It is regarded in the context of economics since it refers to the business and government policies or doctrines that protect the businesses from international trade. The countries that have been an impactful part of the free trade initiative policies and the issues that had been raised globally are the United States of America and Singapore. Both the countries have been the members of the World Trade Organization and have a long history that go back to the free trade policies and how they initiated. The policies of free trade have an impact on the international relations between many countries including these two. The timeline is 1910-2010 which was known to be the century of the international free trade and the policies. The century covers the events that are part of the history of the struggles made for the free trade and the establishment of the World Trade Organization. United States and its establishment of free trade: Before the 1920’s, the United States of America had long suffered at the hands of the policy makers because of whom the tariffs and the restrictions on trade were so high that they reached a level where the increment rates went up to 100 percent. This was during the World War I when the tariffs only increased insufficiently and some of the Acts were passed which were known as the worst of the deals ever made in the history of tariff policies. After the deepening depression amongst the historians and the economists, the guiding principle stood that the tariffs should be lowered down and the policies on international free trade should be loosened up. It was held that the best policy for America was to reduce their tariffs, avoid trade wars to the fullest and create multilateral negotiations (Brown Sherrod, 2006, p.112). As the international trade got more importance, the government of the USA established two innovations that would expand and enhance the trade between the nations in the 1940’s. These were the General Agreement on Tariffs and Trade and the International Trade Organization. Over the years till 2011, there have been many trade policies that have marked their importance in the development of the economy and industry. Being the major developed nation throughout the years, they have greatly relied upon the imports and the exports. Because of the vast business expansion of the American business leaders, much importance has been given to the trade policies. Singapore and its establishment of free trade: Singapore has been one of the countries with the most open economics throughout the past 50 years. Even though there had been some protectionism policies but they were for a short period of time and were overpowered by the entirely free barriers. The most appropriate reason for this free trade policy was that the domestic market was very small, and the country had to depend upon the imports to run the economy. The increasing population in the 1950’s forced the economists to think that trading activities were highly important for the nation. Geography had also played some role in the establishment of the trade policies since Singapore was a natural port where the processing and the storage of the goods became feasible. The failure of protectionism in the other half of the century in Singapore was regarded with two main factors. The first reason of dismissing protectionism was the history which was long developed for free trade. Singapore had also become a British colony because of which they got a free trade status. However, the second reason why the trade policies were implemented was the lack of agricultural activities. In 1970, only 3.78 percent of the labour force was engaged in agriculture which meant that the pressure of transforming the rural economy to an industrial economy was absent. With the presence of the industry and the exports, the pressure of achieving industrialisation was continued (Bercuson Kenneth and Carling Robert, 2006, p. 324). Why did the issues rise? Despite having been the basis of the American wealth since years, the free trade is under threat once again. The policymakers are tending to repeat the mistakes that they made in the past. They believe that the loss of manufacturing jobs and the exposure of the US producers to the foreign competition are due to the free trade. They may repeat their mistakes because firstly they have forgotten the lessons from the past and secondly, the academics department have failed to provide the history lessons to the policymakers and the issues are merely left for the interests rather than being issues involving academic debates. The policymakers fail to realise that free trade is good for America because it allows all the American workers to specialize and thus, produce more efficiently and then exchange them with the goods produced in high quality and low prices in other countries. Apart from the problems that initiated in the administration and economy of America, there were many issues that rose across the world restricting free trade. There were continuous major conflicts that arose because of the armed conflicts between nations. These led to the trade conflicts as well. The events that took place creating conflicts included The Peloponnesian War which had a wide impact. Then there were the Holland and the Portugal world-wide conflict over the trade. Later this was followed by the Britain and the Holland conflicts in which they fought four wars. The southern anger over the northern protectionism contributed to the outbreak of the Civil War. Moreover, the increase in politics and foreign policies influenced the free trade policies globally and the issues regarding the free trade highly arose amongst major governments (Miller Arnold, 2004, p. 55). Structure of the paper: The discussion shows a detailed aspect towards the different policies made by many governments for free trade and how protectionism has at times walked in to disturb the process of globalization. Although the issues are about trade, it is seen that it directly affects the process of globalization and thus, disrupts international relations and the world economy as well. It is important to carry out a debate over the theories that support free trade and those that support or are against protectionism. With the help of evidence to support the theories, the conclusions may be drawn easily. Theory: Since globalization, trade and free markets are the most common global issues today that complement each other, many people talk about the importance of bringing policies that the people across boundaries can share through their culture and their trade resources in a way that would benefit all the humanity. However, the research starts where there is an unfair turn seen in the trading policies that are a nation’s own together with the international trade pacts and agreements. Many over bearing regulations can be imposed which give the rich more power and make the poor, poorer. Despite these overbearing regulations being potentially unfair and restricting, they can also be for the benefit of the people. This means that protectionism to certain extends can be beneficial for the people of the country as per their economic and political conditions. Even though deregulation is supported by many policymakers, too much deregulation can also lead to undermining of the basic social and human rights and environmental damage. Some of the policies made by the IMF for deregulation have in fact, led to further poverty in some countries (Uhlhaas Ann, 2003, p. 269). The mixture of policies and international trade agreements has led to possible issues worldwide. This has resulted in the financial crisis observed since the past few years globally. The World Bank has played an important role in managing the policies and the international trade agreements that support globalization. According to the World Bank monitoring list, there were 78 trading measures that were imposed ever since the financial crisis begun. 47 of these trade restricting measures took effect and had an impact on the international markets and a negative effect on the particular exporters. The theory of globalization best supports the idea of free trade in countries and the importance of free trade agreements. The World Bank team provides trade measures to the developing countries and the developed countries to be able to create strong relations of trade between each other. They believe that this will support globalization and enhance the financial crisis present in the world which greatly affects every nation at some point of time. They support the idea of jointly solving the global problems and sufficiently using the funds provided to the countries. Many of the studies are analyzed and a keen outlook is given to the history of free trade and protectionism and many examples are present to support the need of free trade in the modern business world. On the other hand, many trade measures include the protectionism policies provided by the World Bank. The further study shows that the protectionist measures have put down the pressures because of several factors that differentiate the global downturn from that in 1930’s. In the modern world, the countries are far more independent than they ever were in supply chains, imported inputs and even in services. The domestic market producers are more reliant on the imported inputs and production chains tend to link the global markets through a web of trade in parts. The trade-to-GDP average today is 96 percent than in 1970 when it was 55 percent and the parts of trade has doubled of the proportion of the total trade (Soros George, 2003, p. 266). New Trade Theory (NTT) is a policy set by the new theorists focuses on several economic models that show the roles of the increasing trade and trade network effects. It can be assessed that this theory is applied by the theorists in the United States as they argue that the protectionist measures that are imposed allow a very huge industrial base to the countries and then they are able to dominate the world market. However this theory is based on many assumptions which include the monopolist competition and the increasing returns to scale. This theory can deal with a situation where there are too many different firms with different production processes such as in the US. The World Bank is facing much of the issues regarding the balance of the trade policies that should be imposed. For example, some people strongly believe that the main problem for the financial crisis is the lack of global regulations available for the protection of the developing countries as they enter the global market. The World Bank has also cautioned that globalization and localization (the high demand for local autonomy) tends to pose problems and can also offer benefits, if it is not handled properly. There is a growing free trade movement held around the world through which the local producers are able to trade their products freely. The free trade movement is supported by the World Bank and many of the independent countries are opening the ways for their traders and involving themselves in globalization by making healthy trade agreements with other nations (Kubota Keiko, 2005, p. 160). Neo-mercantilism is a theory in which exports are encouraged, imports are discouraged, capital movement is controlled and the currency decisions are centralized by a central government. Through this policy, the government will be able to hold more foreign reserves and there will be a better monetary and fiscal policy. It also gives the government more autonomy and control as advantages and questions the standard of living. Singapore is a neo-mercantilist country and its main objectives are to allow a justified protection system through which the nation can develop its industrial and commercial infrastructure and at the same time compete in the international trade. The “marketplace for ideas” is an expression which shows the freedom of market based on an analogy and an economic concept. The idea of the free marketplace was first originated in the US where they believed that the there should be truth in the competition of ideas and also gained the application of the freedom of press in a liberal democracy. This idea of a free marketplace compliments the free trade policies and has also been a base to the study of the importance of a social institution. Evidence supporting the theory: Free trade has always been a wise way to deal with the international trading matters. Many of the countries that have adopted free trade policies like Hong Kong and Singapore provide their nation a free way in which they can benefit fully from the trade of their products. The positive impacts of the open market are clearly evident from the prominent growth seen in the US economy over the past decade. Statistics show that the important years of the US economy that promoted free trade saw a growth in the economy by 23 percent and added more than $2.1 trillion to the country’s GDP. This has raised the wealth of an average American by more than $5,500. The free trade policies and the trade agreements were strengthened in 1995 when the World Trade Organization was set to settle the trade disputes. The US economy has been seen as an example and an evidence for the promotion of the free trade policies and agreements because a large number of developing countries are nowadays benefiting from the US economy and policies for trading. This has been reported by the head of the International Financial Institution Advisory Commission. Evidence also shows explaining the protectionism measures often taken and known to be dangerous for the economy and globalization process. Recently, the government officials and the private sector leaders have agreed to resist the domestic pressure to slide backwards into protectionism in Brazil, India, Malaysia, Sri Lanka, Thailand and South Africa. A senior professor at the Columbia University has also concluded that it is very important for the control of the global crisis to be able to defend the open market system and protect it from being restricted. The agreements provided by the World Trade Organization have provided greater stability for trading relations. Because of the different political economy today, some of the proposed restrictions have been rejected. The evidence lies in the Brazilian example where the bureaucracy made attempts to impose a widespread of licensing arrangements just to provoke the outrage response of the private sector that led to immediate reversal (Wade Robert, 2003, p. 90). As the World Bank approach talks about globalization and the world economy growing as a result of that, it is evident that in 1960 the total ratio for the foreign trade to GDP was 25 percent. And since then, this figure has continued to grow excluding the periods of global recession. In 1999 it was recorded to be 52 percent. These statistics confirm the rapid pace of growing world economy and globalization through the implementation of trade measures. It also seemed to be difficult to keep a track of the international flow of capital, information and human resources but there has clearly been an increase contributed by globalization. The growth seen in the free trade agreements that were supported by the World Bank is seen through the example of the European Union. The members were 6 originally and now stand at 15. There is further expansion expected over the years when more countries adopt the membership. As a result of these expansions, these groups have diverse members for their economic development and economic systems. Initially the trade agreements were made between countries that were geographically close, but with the development, the countries that were at a far distance have also entered in trade agreements for example US and Japan, Singapore and New Zealand. The trend for the growing interaction between the countries and their trading policies has also resulted in the increasing depth of these agreements. With the increasing understanding and the development of the international relations for trading between countries, the globalization has benefitted and so have the economies. The countries that have been entered in the trade relations have been able to manage good relations and bring closer the benefits from trading activities. The characteristic of these trade agreements between countries is that it also enforces the other countries to come together and enter into agreements to improve their trade and economy. For example as Japan completed the agreement with Singapore in 2001, a workshop to research the viability of an agreement with Mexico was also formed. By far, Singapore and Honk Kong have been the countries that have successfully carried out free trade policies and that has led them to be able to participate in a free market and give more opportunities to businesses to operate in their countries and from their countries in other countries. They benefit from the open markets, open trading, high competition and the market diversification. Work Cited Bercuson Kenneth, Carling Robert. Singapore: A Case Study in Rapid Development. D.C: International Monetary Fund, 1995. Print. Brown Sherrod. Myths of free trade: why American trade policy has failed. California: New Press, 2006‎. Print. ‎ Kubota Keiko. Why the move to free trade? Democracy and trade policy in the developing countries. NY: Cambridge University Press, 2005‎. Print. ‎ Miller Arnold. Free Trade: Current Issues and Prospects. NY: Nova Publishers, 2004 Soros George. The Alchemy of Finance. NY: John Wiley & Sons, 2003‎. Print. ‎ Uhlhaas Anne. What are the main advantages and disadvantages of global free trade? Does it exist in practise? NY: GRIN Verlag, 2003‎. Print. ‎ Wade Robert. What strategies are viable for developing countries today? The World Trade Organization and the shrinking of ‘development space. NY: Routledge, 2003‎. Print. ‎ Read More