Comparison Of Protectionism And Free Trade Economics Essay
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Published: Mon, 5 Dec 2016
Free trade is whereby trade transaction is allowed to continue freely without any hindrance from the government in form of tariffs and restrictive quotas. Governments often impose restriction on imports this, is usually done with the aim of blocking foreign companies from taking control of local markets as well as companies. On the other hand protectionism is whereby government restricts trade through various ways therefore making it difficult for foreign countries to trade freely. Protectionism basically protects local businesses as well as workers by putting restrictions on international or foreign businesses. There are a number of theories that were associated to protectionism for instance mercantilism which works at protecting trade that is considered positive. Another theory that regulates protectionism is import substitution. Modern economists are opposed to protectionism because it’s very costly with minimum benefits which are not comparable to its expenses. Another reason why today’s economists are opposed to protectionism is because it hinders economic growth (Hoyt, 2010).
One of the main reasons why governments are for protectionism is because they are able to protect its people in domestic industries which have a lot of influence on politics. It’s important to initially understand that these two concepts are both regional issues. For instance free trade is an economic policy which was developed by American states who were involved in slavery. On the other hand protectionism is a manufacturing issue that was brought forth by the northern states. The two regions have a history of conflict which has not ended and they were the major contributors to civil war. Historically free trade came into play because the southern states that focused on slavery needed to acquire goods from other nations as a result of their cheap labor which was not in position to enable them produce the goods that they were in need of. Southern American states lacked mechanization knowledge and that is why there were not able to produce many goods that were essential to them.
On the other hand northern countries manly majored in mechanization and that is the reason they were successful in the manufacturing sector. Therefore the northern countries developed tariffs in order to allow the British competitors to successful compete with them. In the United States protectionism in form of bounties and tariffs were enforced in order to protect upcoming industries. There are a number of policies that can be used to achieve protectionism. These policies include tariffs or taxes which are imposed on all goods that have been obtained from other countries. The rates are usually different basing on the type of goods that have been imported. Duty that is imposed on tariffs increases importers cost making their goods expensive in the local markets. As a result the supplies of imported goods on local markets tend to be reduced considerably. Exported goods are also subjected to duty making the same impacts as those of imported goods (Hoyt, 2010).
Most of the time export tariffs are usually not enacted since they are harmful to local companies as a result only import taxes or duties are enacted by the government of that particular state. Another policy that is important in protectionism is import quota which controls the quantity of foreign products on local markets by raising its price. There are a lot of similarities between tariffs and import quota, the only difference being that tax is distributed to companies or people importing foreign products. Other times governments may use their administrative powers to regulate or bar imports. Direct subsidies also play a role in regulating imports because government funds unstable local companies in order for them to be in a position to compete with foreign firms.
Exports are usually increased by the government by offering export subsidies; the last way in which a government can bar imports is by manipulating exchange rate. In this case a government may lower the value of its currency making imports very expensive. These are some of the methods that are employed by the government in order to prevent and monitor foreign business as well as international trade. Free trade cannot occur when such restrictions are in place. All the policies that are used are aimed at increasing the prices of imported goods excluding them from normal market competition. Other practices which are viewed as protectionists include restrictive and tiresome procedures in acquiring import certificates. These processes are usually cumbersome and very tiring as a way of discouraging foreign businesses. It’s important to note that free trade has some provisions or restrictions. For instance protectionist provisions like patent restrictions, intellectual property as well as copyright is normally used to help large organizations to make profits (Altschiller, 1988).
Protectionists insist that the government has a legal right to protect the welfare of its people as well as their economy by restricting destructive foreign businesses. They argue that free trade endangers the living standards of its people through exploitation that might occur as a result of allowing imports to control local markets. Comparative advantage is what proponents of free trade use in their defense. This is the capability for goods to be produced at an opportunity cost that is lower though the product is of the required standard. This policy aims to benefits all the relevant parties and that is why the benefits accrued from such a practice are referred to as gains from trade. Comparative advantage has a number of effects on a countries economy. For instance maximization of produce is possible only that wealth transfer may results whereby a currency of a particular nation may accumulate in another country in a different foreign currency.
Despite of the market fluctuations it’s very possible to maintain comparative advantage. Economic agents save differently and because of this wealth transfer between the partners countries may easily occur. Monetary policies are usually used in case a countries currency becomes depleted as a result of its accumulation in other countries. There are many failures and successes that have resulted because of such practices. The opponents of free trade employ the development economics theory in their effort to support protectionism. Economists that are for protectionism argue that comparative advantage has been passed by time. Despite the fact that comparative advantage is a great policy in economics its opponents urge that it cannot be effective in our 21st society. The reason why it’s not logical to the modern economy is because today’s capital tends to flow to areas where costs are reduced in order to benefit from absolute advantage (Altschiller, 1988).
They further argue that for effective application of comparative advantage, there is need for full time employment, something that is not possible in the modern economies. A protectionist was founded on the basis that free entry of imports on local markets places local goods at a disadvantage. In case tariffs are lifted from imports a country will solely rely on taxes obtained from within and this will not be beneficial to domestic industries. This policy is largely applied by the United States where it imposes heavy duty on US produces without taking into account the destination of those products and services. Most countries that suffer from protectionist policy are those which are not members since they are disadvantaged.
Another reason why economists strongly supports protectionist is because they seek to protect new industries which are not in a position to fight with established foreign industries. For this reason such companies are given room for growth on the basis of protectionism in order for them to be in apposition to actively compete with well established foreign industries. Therefore protectionism is used as a tool to allow local industries to reach a level that they can be effective in taking part in global market. Because of the wrangles between the two economic policies there has been enforcement of a number of restrictions in order to protect citizens. For instance capitalism is viewed an evil act on the basis that it does more harm to the people its meant to protect than good. Particular governments have come up with a number of laws to hinder companies from using some evil deeds to get profits. For example child labor laws as well as environmental protection laws have been enacted to limit companies from using some crude ways in pursuit of profits (George, 2009).
Economists urge that social restriction laws put the companies bound by those restrictions in a disadvantaged position. For these reason those laws tend to bring more harm than the anticipated good on its people. Much criticism towards protectionists emphasizes that they have failed in protecting the people they wanted to protect. Economists prefer free trade as opposed to protectionism. By employing comparative advantage a country is entitled to many profits which are much far beyond the resulting losses. There are many job opportunities which are created through free trade because a country is allowed to specialize and produce that which is best at. For instance countries that are compliant to free trade are only allowed to specialize in production of services and goods that they have comparative advantage over.
Loss that is accrued under protectionism does not benefit any particular group of people. On the other hand under free market there is no any overall loss therefore the profits which are accrued to countries that are under free trade are overwhelming. Many economist scholars as well as professionals believe that free trade is beneficial even to those developing countries that are not subject to labor and stringent health standards. This comes about because of the opportunities which are created by foreign companies to the local people. The economy of that country is subject to improvement because of the effect of the foreign business and investors. The presence of foreign business creates competition in the local market and as a result the living standards of those people as well as their wages are more likely to improve. Protectionism only seeks to secure the job market in the already developed countries leaving out those countries that need to grow and establish themselves economically.
One of the factors that need to be put into much consideration is that employees from the third world or underdeveloped countries only take part when they are sure that they will benefit from whatever agreement. Therefore protectionism is biased since it only seeks to benefit the developed countries and as a result it’s very difficult to convince developing countries into the agreement if they do not see the benefits that they are entitled to. By the fact that workers from developing countries take up poor paying jobs in foreign companies it means that the state in their own local companies is very poor. Therefore it’s important to allow for a policy which will attract developing as well as developed countries. Poor livelihoods in developing countries are a clear indication of low employment prospects therefore free trade greatly benefits the local people to better their lives as well as their economy (George, 2009).
The former American federal chairperson argues that legalization of protectionism law is a hindrance to expansion, new growth and efficient industries. And as a result the country’s economic growth is more likely to be impacted negatively. On the hand protectionism has been the major cause of the world war that has left many lives negatively affected. It’s very easy to hinder goods from other countries but it’s relatively difficult to block armies and that is the reason why the protectionist policy played a great role in initiation of World War I and II. Free trade is beneficial since it allows local and foreign countries access to the available domestic resources. Foreign and local participants are equal partners when it comes to acquiring resources that are essential for trading.
Economists argue that citizens of all participating countries should be entitled to equal resources whereby they can use the available resources equally. Besides that they should also be partakers of other resources which are under the social welfare departments for instance education as well as labor laws. A hindrance to reallocation of resources is achieved through entrance policies which require acquisition of visa. Policies that govern visa restrict and encourage trade within given nations. Protectionism seeks to promote social welfare which does not improve the economy of the country whereas there are many benefits that come with mobility and great freedom. Countries that are under the European Union uses visa requirements as a way of restricting foreign investors from entering their market. Therefore visa acquisition is another way of protectionism that is practiced by the local government. After Second World War many developed countries have been working towards elimination of protectionism in order to promote free trade which is more beneficial (Fawcett, 2007).
Free trade is possible through a number of treaties. For instance world trade organization was founded with the objective of promoting free trade. Despite the benefits that can be accrued through free trade the world’s financial crisis will force many countries to settle for protectionists laws. Some of the key factors in free trade are price which is reflected through the supply and demand curve. In this theory resources are allocated on the basis of supply and demand as dictated by price. Free trade in unique from any other forms of trade because resource allocation is manly and solely dependent on supply and demand which may be a true reflection of the current state or not. Artificial prices only come into play as a result of government influence of goods and services through protectionism. Free trade is associated with absence of tax on goods and services as well other restrictive barriers.
Free trade allows business to transact without any restricting policies; it’s also characterized by free accessibility to markets as well as to market information among other many provisions. At the moment many countries of the world are bound by the regulations under the world trade organization besides that they are members of the regional free trade areas. Free trade within the specified regions seeks to eliminate trade barriers between partner countries. Other aspect that promotes free trade is open skies agreements. The benefits of free trade can be simply illustrated by observing the impacts of supply and demand on tax. Tariffs basically cause domestic price of products to rise and as a result consumption is affected negatively. Price of the product rises because production price rises and basing on demand and supply local consumption greatly falls (Fawcett, 2007).
High local prices affect local consumers because their surplus is drastically reduced. As the consumers surplus diminishes producers surplus on the other hand are greatly increased. The government also greatly benefits from this though the two benefiting parties cannot be compared to the losing or diminishing party. Therefore in this case the loss is very great in relation to the profit and that is the reason protectionism brings much harm to the people than the intended good. Therefore the society can only gain when there is free trade. The benefits that can be accrued as a result of free trade have not been fully identified but it’s evident that a country’s economy greatly grows as a result of free trade. Protectionism simply gives priority to the interest of the government and country in question.
One of the countries that has greatly benefited from international trade is the United States. Competition that comes as a result of free trade is very essential to provision of better services at a relatively cheap price. Some of the other benefits of free trade include new markets, continual innovations, boosted savings as well as investments. Americans citizens have been able to access goods of relatively low price as a result of free trade. When consumers access important products at a cheaper price their livelihoods are likely to improve. Poor countries have also greatly benefited from this arrangement because they are able to enjoy the benefit of freedom, economic development as well as the benefits of the rule of law. For example the economy of the United States has improved within the past one decade as a result of free trade. There are many benefits that a country and its people are entitled to as a result of free trade and these benefits are so overwhelming than the minimal losses that might occur on the while trading (Cameron, 1986).
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