Free Trade Vs Protectionism: An Essay

With the increase in the interconnectedness of the world trade between countries has been increasing as well since a long time of history. There are two trade strategies adopted by countries, and they are trade liberalism and trade protectionism. Trade liberalism is defined as the movement of goods and services internationally by removing or reducing tariff and non-tariff barrier. Trade liberalism became drastically proficient after the World War II and most of the developing countries adopted the trade liberalism strategy in the 1980s and grew intensely by 1990s. Trade liberalism limits the government's interference in free trade such as minimizing the decision-making of the government on the resource allocation (Shafaeddin, 2005). On the other hand, trade protectionism is just the opposite of trade liberalism and it is the restriction on international free trade by implementing policies to focus on the local markets rather than dependency on imports.

Economies in the today’s world are facing one of the serious options that is to choose a trade strategy. Whether to adopt trade liberalism or trade protectionism. Whether foreign goods should be allowed into the country with low tariffs and freedom of relocation of industries around the world or should it be better to impose huge tariff on foreign goods and services and stop or reduce exports of goods in the country and allow the domestic producers to grow. It is a dilemma in today’s huge interlinked world but the debates between supporters of trade Liberalism and supporters of protectionism includes so many perspectives. So, the approach I take in this research paper is to analyze the effect of the two trade strategies: trade protectionism and free trade (in other words, trade liberalism) on the economic development of a country and how efficient it is in the business environment.

Trade Protectionism and Trade Liberalism on the Economic Development of a Country

The argument between trade protectionism and trade liberalism started with the statement of a theory known as mercantilism which is the predecessor trade strategy of protectionism in the fifteenth century intensely in Europe. Until the 9th of March 1776, the philosophy of mercantilism prevailed leading as the strongest theory of economies. The main perception of Mercantilism was that in order to increase the economic strength of a country, a country has to try to avoid depending on export items and rather produce as many things as possible within the country. Moreover, in order to shoulder local industries, huge tariffs should be imposed on the imported goods and services by the government. High tariffs on imported goods and services stop or reduce competition between local markets and foreign investors. According to merchandise, a strong country are the ones that achieve total independence in the trade by producing their own goods and services.

The Scottish philosopher Adam Smith in respond to the perception of nature of the wealth of nations by merchandise argued the underlying meaning of mercantilism in his book: the history of the modern world. Smith argued that the best way for a country’s economy to grow was not through trade protectionism where the country avoids international trade and produce all the goods and services on their own. This is because according to him countries have different strengths in different productions may it be depending on the human force or the landscape or natural resource of a country. And countries cannot do well in every sector of an economy. Countries should focus on the strengths that they possess. Some countries possess more dexterity at manufacturing furniture while others might have the ability to manufacturing clothes or some might be good at producing advanced technologies. This theory at the level of nations can be explained with an example related to an individual level. If someone has an inborn ability to be a scientist, they should focus on becoming a scientist and not waste a huge amount of time on doing something that they are not good at or lack the ability to achieve. Likewise, even countries should focus on producing goods and services according to their ability and which they are not good at producing can be attained by trading with other countries.

An example of such cases can be: if China could produce wooden goods more cheaply than India and if India could produce tea more cheaply than China, then it would be beneficial to both the countries to exchange the product. They can gain the benefit of lower price, low effort and less time consuming. Both countries will have economic development as the job opportunities for capital and labor would be increased and will be focused on those fields where they have the dexterity in achieving. Smith’s theory convinced most of the economic and political classes of north Western Europe very quickly. For example: in Britain, his theory was first put to a practical test in relation to the production of grain in the country. Protectionism was provided by the government on grain for many years. Import of grain was cut down to support local production of grain and increase the country’s economy. Today, David Ricardo put up the perspective that the protectionism on grain production hindered economic development of the country rather than developing it. After much of the argument on two trade strategies the protectionism was removed which led to the reasonable price of corn and many people could save money from the cheaper price. This trade liberalism helped the economy of British grow drastically making it the leading economy in Europe. However, the trade liberalism made life difficult for people in local farm due to the huge import of goods and services from the USA and Canada.

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The moral worthiness and stability of a country are affected by trade liberalism. This argument was because the benefits of trade liberalism can be obtained only through several processes. The government has to spend on educating the people in the economy field capable in what they possess dexterity in. Not only that but also the government need to enhance the social mobility which would cost huge expenditure. That is why for example, when a Malaysian worker can manufacture a car for 7 dollars per hour whereas Singapore can cost 38 dollars per hour it is clearly wise to allow Malaysia to do it. This is the same for other goods and services in the free market. However, defenders of free trade have ignored implementing political programs required to help the productivity of free trade. They have not considered the price that comes along with the protection of domestic markets and cutting down imports and export activities with other countries. Furthermore, any nation who adopts trade liberalism has to ensure that economy sector pays taxes which is an advantage to the economic development of a country but eventually the money is used to give training to people in sectors of the economy which is due to the competition in the global market.

Trade Liberalism and Its Efficiency in Today’s Business Environment

Business means the process of selling and buying and the term environment refers to anything which surrounds a system. Thus, the business environment is defined at the surrounding including all people in which business takes place. Some define it as all the internal and external factors which affect business. In the twenty-first century, with the increase in interconnectedness, economic globalization is like a buzz word. It is broadly defined as the increased interconnectedness of national economies into a single global economy to a larger or lesser extent (Heywood, 2011). Compared with previous periods of 1946-1979, economic integration increased in the 1980s and the early 1990s. Economic globalization promoted the betterment of free trade by the nineteenth century. From the second half of the twentieth century on after the World War II, economic globalization was vibrant and institutional systems were dependent on market economies and rich countries. Trade is no more domestic and it is more on the global level by which it means trade liberalism is practiced more than trade protectionism. Research shows almost all the countries have changed their policy towards free trade by lessening the tariff and non-tariff barriers. This is mainly done in the expectation of economic development through global trade. Also, the economic benefit depends on the stages of economic development and it differs from countries to countries. For an instance, if a country who started having trade liberalism strategies when its economic status was lower-middle income, they are most likely to benefit by 3% on average which is more compared to other developing countries that started practicing trade liberalism when they were low income or upper-middle income. Countries especially South East Asia has achieved economic development due to their policies towards trade liberalism. For example, countries such as India and China have shown great economic development and poverty decline due to free trade policies. However, trade liberalism has not benefited all the countries. For example, most of the African countries like Ghana despite the encouragement of export business and lowering tariff, they are not on the side of benefits from trade liberalism. So, trade liberalism leads to both winners and losers. On the other hand, trade liberalism in most developing countries have led to the economic decline. This is because after the adoption of trade liberalism the imports in the countries seem to increase drastically while the exports are very limited. Reduction in exports and dependency on foreign goods have reduced economic development in most of the countries. For instance; right after following the trade liberalism strategy the import rate grew much higher than the export rates in countries such as Latin America, Kenya, and some African countries. This showed a significant decrease or stagnant economic growth in the country.

Other benefits of practicing trade liberalism in the economic development of a country are supported by many scholars such as Ricardo, for example, due to the competition that exists between countries in the market the price will be reduced and at the same time efficiency is enhanced as well (Ricardo, 1971). This will thus contribute towards the economic development of a country. According to the world bank, compared to trade restriction, trade liberalism is seen to be more economic strengthening. This can be supported by research done by world bank on the trade policy and economic performance. 41 developing countries from the 1960s to 1980s were taken into account and the economic development of countries who adopted trade protectionism is seen to be lower than the countries who adopted trade liberalism (The World Bank, 1987).

However, in trade liberalism, foreign investments occur hugely among world’s richest states and it is always the stronger states that gets vast foreign investments. Developed capitalist countries are still the most dominants and are acting as international rule makers. For example, states like the United States have autonomy for most of their existence that most of the other weaker states from developing countries don’t. USA has an uneven impact over the IMF and the World Bank. USA's power to change the General Agreement on Tariffs and Trade (GATT) into stronger open market World Trade Organization (WTO) shows how economic globalization favors the needs of the USA. So, it is hard to say if the theory of Smith can be applicable to all the countries and all also not all the countries experience the same economic benefits from free trade.

Trade Protectionism and Its Efficiency in Today’s Business Environment

Trade protectionism as I mentioned earlier it is mainly to support the domestic market and reduce foreign investments by putting limitations to free trade. A case study to support the efficiency of trade protectionism in today's market can be the studies of trade policies of the US and why trade protectionism was adopted. According to Tullock and Krueger countries emphasize on trade protectionism policy when interested groups seek protection from the nation which is referred to as rent seekers. The public loses trust in the equality of market and seeks the intervention of government thinking it will be beneficial. For example, US farm lobby sought the intervention of the government which is to increase the national income of farm households more than the national average. This can be proved by the facts collected in 2006 and 2008. In 2006, the average farm household income was $77,654 which was higher than the national average income by seventeen percent. According to research, in 2008 the farm household's income is expected to rise to $90000. This was followed by huge economy rise in the farm households, and they constituted about 2 percent of America’s wealthy population (Gordon and Cho, 2008). Due to this result, most people started to follow the trade protectionism strategy. For example, United Fresh Produce association sought for nation’s interference after the success of rent-seeking method adopted by the farm households. They received benefits such as monetary gain. However, the main argument of trade protectionism lies in the employment, national defense and infant industries. In the trade protectionism strategy, due to the decrease in the imports and exports industries, it drastically decreases the job opportunities or even job lost in these fields. Therefore, the main intention of trade protectionism; to protect and increase the productivity of the local market is equalized by the job losses in export and import sector industries. Moreover, due to the lack of competition globally, the price of the goods and services can be very high while the quality may be deficient. This will only bring pressure to the people in that country. When business firms ask for protection from the government it becomes very costly for them and also these days, we can hardly find any industries which do not have relation with foreign investors. Not only that but most of the national defense companies are now foreign owned. For example, US security review notwithstanding, this defense company is now vulnerable to foreign dominance. The infant industries, i.e. newly established firms, face difficulty to compete in the international market where most of the firms have already developed much more efficient and innovative technologies. So, the infant industries seek protection from the government by restricting the imports. They stay under protection and also increases the duration to stay under protectionism through political supports and often successfully raise their levels (Pincus, 1977).

Conclusion

The two trade strategies that countries adopt for the trade of goods and services are trade liberalism and trade protectionism. With globalization, in the current era, there is hardly any countries who do not practice trade with other countries. Trade protectionism was much prominent before the World War II two while trade liberalism became quite prominent after the World War II with the establishment of the new world organization. The argument that is often made is which one of the two trade strategies is more beneficial to adopt in order for economic development of a country. Trade liberalism is definitely a strategy which helps countries to increase their national wealth. This is because as the tariff or non-tariff barriers are removed the exports and import activities increases which leads to rising in the market leading to more job opportunities, more cost-efficient of goods and services to people with better quality due to the competition that exists in the global market. However, the downside of trade liberalism such as inequity between strong countries and poor countries should now be neglected. Not all the countries gain the same economic benefit from trade liberalism and it is often seen to be in favor of rich countries. Moreover, for new firms, it is difficult to directly compete in the global market with firms who have already reached far ahead in innovative technologies and production of goods and services thus they need to rely on trade protectionism to grow. On the other hand, trade protectionism is mainly adopted so to support local markets and local people. When the imports are reduced or stopped the opportunities will be given to the local market. However, it should be considered that as a country cut down imports eventually the exports also decrease. With this, there is no job opportunity in the export and import industries and some even lose their jobs. Therefore, the growth in the employment rate remains stagnant. Also, due to lack of competition with the global market the goods and services might not be efficient and the price might also be higher. Therefore, I believe trade liberalism should be adopted by countries in order for the economy to grow at the same time the country should provide trade protectionism to firms which are new to the global market so that they can develop and compete in the international market. Another policy that could be changed for trade liberalism to be more efficient is by giving all the countries equal power in the field of international market and should not be entirely placed on rich countries like USA and China. This trade strategies I believe would help the economic development of countries to grow in an efficient manner rather than considering only the advantage or only the disadvantage in any of the strategy.