Free Trade vs Protectionism

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Free Trade vs. Protectionism

The argument for so-called protectionism (called "fair trade" by some) may at first sound appealing. Supporters of protectionist laws claim that keeping out foreign goods will save jobs, giving ailing domestic industries a chance to recover and prosper, and reduce the trade deficits. Are these claims valid?

Classical liberal philosopher John Stuart Mill observed in the last century that "Trade barriers are chiefly injurious to the countries imposing them." This statement is as true today as it was then, and there are many reasons for this including higher lost jobs, higher prices, and higher taxes. These are some of the critical reasons why protectionism can harm countries instead of helping them. Free trade can be very beneficial to both trading countries. This is because of three different aspects Comparative advantage, economies of scale, and increased competition. The case for the right of citizens of all countries to trade freely with one another has never been stronger. The record of economic successes resulting from trade liberalization is unambiguous freedom to trade brings prosperity.

Cheap University Papers on Free Trade vs Protectionism

Protectionist laws can be thought of as an anchor on any nations economy. They raise taxes on imported goods and or impose limits on the amount of goods governments permit to enter into a country. They are laws that not only restrict the choice of consumer goods, but also contribute greatly both to the cost of goods and to the cost of doing business. So under protectionism the individual consumer can end up poorer, with less purchasing power for buying other commodities they may want or need. Moreover, protectionist laws that reduce consumer-spending power actually end up destroying jobs. In the U.S., for example, according to the U.S. Department of Labor's own statistics, protectionism has destroyed eight jobs in the general economy for every one saved in a protected industry.

Imposing protectionism also leads to higher prices. Japanese consumers pay five times the world price for rice because of import restrictions protecting Japanese farmers. European consumers pay dearly for restrictions on food imports and heavy taxes for domestic farm subsidies. American consumers also suffer from the same double burden, paying six times the world price for sugar because of trade restrictions. The U.S. Semiconductor Trade Pact, which pressured Japanese producers to cut back production of 56k computer memory chips, caused an acute worldwide shortage of these widely used parts. Prices quadrupled and companies using these components in the production of electronic consumer goods, in various countries around the world, were badly hurt.

Protectionist laws not only force you to pay more taxes on imported goods, but also raise your general taxes as well. This is because governments invariably extend their Customs Department bureaucracies to force compliance with their new rounds of trade restrictions. These bureaucrats must be paid. There is also the expense of more red tape and paperwork for trading companies and more harassment of individual travelers passing through the borders.

So, the question can be raised, who really gains in protectionism? In spite of evidence of damage caused by trade restrictions, pressure for more protectionist laws persists. Who is behind this, and why? Those who gain from protectionist laws are special-interest groups, such as some big corporations, unions, and farmers' groups'all of whom would like to get away with charging higher prices and getting higher wages than they could expect in a free marketplace. These special interests have the money and political clout to influence politicians to pass laws favorable to them. Politicians in turn play on the fears of uninformed voters to rally support for these laws.

On the other side, the losers are other ordinary consumers. People's freedom to choose among a variety of consumer items is being restricted by these laws. People are being impacted by higher taxes and higher prices in order to benefit a few politically privledged people. Dr. Walter Block, Senior Economist for the Fraser Institute, eloquently stated, "Protectionism is a misnomer. The only people protected by tariffs, quotas and trade restrictions are those engaged in uneconomic and wasteful activity. Free trade is the only philosophy compatible with international peace and prosperity."

In protectionism, both sides essentially lose out when free trade is not available. Suppose when the government of Country "A" puts up trade barriers against the goods of Country "B", the government of Country "B" will naturally retaliate by erecting trade barriers against the goods of Country "A". The result? A trade war in which both sides lose.

Consider how attempts to protect American jobs could actually end up destroying American industries. The majority of parts in an American-made personal computer are imported. If the U.S. government tried to ensure the computer was 100% American-made, so as to create jobs making computer parts, you would end up with a computer wherein the parts would be much more expensive before. Without competition, there would be little incentive for American parts manufactures to cut costs and improve quality. The market prices for PCs would begin to rise which would cause PC sales to drop, and PCs would become luxury items. Also, fewer workers would be needed to make PCs and write software. Attempting to create jobs making computer parts in the United States thus would mean that America today would have fewer jobs in other higher-valued sectors.

Another outcome is that when goods don't cross borders, armies often do. History is not lacking in examples of cold trade wars escalating into hot shooting wars. Europe suffered from almost non-stop wars during the 17th and 18th centuries, when restrictive trade policy (mercantilism) was the rule; rival governments fought each other to expand their empires and to exploit captive markets. Another example would be when British tariffs provoked the American colonists to revolution, and later the Northern-dominated U.S. government imposed restrictions on Southern cotton exports'a major factor leading to the American Civil War. Also, in the late 1th century, after a half-century of general free trade (which brought a half-century of peace), shortsighted politicians throughout Europe again began erecting trade barriers. Hostilities built up until they eventually exploded into World War I.

The world enjoyed its greatest economic growth during the relatively free trade period of 145-170, a period that also saw no major wars. Yet we again see trade barriers being raised around the world by shortsighted politicians. Will the world again end up in a shooting war as a result of these economically restrictive policies? Can we afford to allow this to happen in the nuclear age? As has been repeated by many economists, the philosophy of protectionism is a philosophy of war.

But how can free trade benefit countries? If a firm has lower productivity than its competitors, with the same prices for factors, its costs are higher, and it lacks competitiveness. So, if a nation has lower productivity than another, how can it gain from trade? Nations can gain from trade because trade allows specialization and improves production. It is comparative advantage, not absolute advantage that determines the pattern and gains from trade. Comparative advantage is defined as, "The comparison among producers of a good according to their opportunity cost." When each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy rises, and this increase in the size of the economic pie can be used to make everyone better off. As long as two people have different opportunity costs, each can benefit from trade by obtaining a good at a price lower than his or her opportunity cost of that good.

Also, gains from trade includes an increasing returns to scale. Specialization and trade expand the market size and permit increased output and lower costs due to economies of scale. There is also an increase in competition from free trade. It reduces the market power of domestic monopolies and oligopolies.

A century and a half ago French economist and statesman Frederic Bastiat presented the practical case for free trade "It is always beneficial," he said, "for a nation to specialize in what it can produce best and then trade with others to acquire goods at costs lower than it would take to produce them at home." In the 0th century, journalist Frank Chodorov made a similar observation "Society thrives on trade simply because trade makes specialization possible, and specialization increase output, and increased output reduces the cost in toil for the satisfactions men live by. That being so, the market place is a most humane institution."

Free trade stands out as one of the cornerstones of a healthy economy. It is a necessary condition for any country's economy just like freedom of speech is a necessary and prominent component of the democratic system.

However, there are some economists and politicians who claim that free trade is destructive to our economy. They say it allows manufactures to go overseas in search of cheap labor, thus giving away American manufacturing infrastructure and losing jobs. They are also opposed to U.S. trade deficit (especially with Japan); based on the assumption that trade deficit makes America a weaker country, while enriching Japan.

In reality, if U.S. manufacturers were moving overseas in large numbers, the industry would go through a severe crisis. Instead, it has been compromising 1% of the total economy for the past decades. Moreover, cheap labor does not prove to be as attractive as some people say it is. If it were, countries like Somalia, Haiti or Bangladesh today would be the world's industrial powerhouse they would not be as poor as they are today. Investments into such countries would constitute a much larger percentage of the U.S. economy. And it is time to realize that trade deficits are actually beneficial for our economy. The real reason the U.S. has a trade deficit with Japan is that there are twice as many Americans as there are Japanese. In order for America to have balance with Japan, each Japanese would have to buy twice as many American goods as Americans buys from Japan.

Furthermore, history proves that as the U.S. trade deficit increases, the unemployment goes down. We are witnessing an unprecedented level of international trade. During the last 5 years total annual foreign investment has gone from $14 billion to $50 billion. Yet, burdensome tariffs and regulations hinder the free trade from providing its true benefits. Instead of protecting, these tariffs cost the economy huge amounts of currency. In 14, the tariffs protected 180,0000 jobs in 1 American industries. If these jobs were allowed to allocate themselves in the free market, the economy would not have lost $. billion or $170,000 per saved job. Protective tariffs for 47 Japanese industries saved about 180,000 jobs in 18'at a cost of $110 billion or $600,000 per saved job. In 10, tariffs protected 1.5 million jobs in the European Union, costing $100 billion or $70,000 per jobs. After developed and developing countries reduced their tariffs on industrial goods during the Uruguay Round of the General Agreement on tariffs and Trade, the world gained about $50 billion, according to the estimates by the Organization for Economic Cooperation and Development.

Small business in the United States plays a huge role in exports and imports. Protectionism policies unjustly harm this healthy sector of the American economy. Actually, 6% of firms with 500 or more workers export goods and services. The firms that export tend to be among the fastest growing of the small businesses. They represent most of U.S. job growth. They account for a 6.7% increase in revenue in the last 1 months, while that number is only 4% for other small firms. More than 50% of the exporting firms develop a new product/service each 1 months. This demonstrates a very healthy growth for the industry as a whole. Of course, as exporters or importers increase their wealth and enhance their position in the economy, the whole country is by no means worse off. Free international trade also can help in keeping the inflation rate low.

A variety of factors are to be credited for such an accomplishment. When countries connect with one another through international trade, one country will be very sensitive to economic hardships in another. Thus, trading countries will watch common markets and put pressure on the neighboring countries to reform their systems before serious damage is done. Besides, domestic countries will concentrate on the reduction of costs to be able to compete with foreign companies. This effect has already been seen to take place. During 15, prices in all Organization for Economic Cooperation and Development countries rose average 7.%. Among European Union countries inflation only constituted .1%. Among G-7 nations, the number was only .%.

One of the main sources of support for free trade lies in the production and consumption efficiency models. No matter how a country implements its trade models, there will always be improvement in the overall production and consumption models when a country switches from protectionism to free trade. This means that the country will increase its wealth. Improvement in production efficiency results in producing more goods with the same amount of resources. To achieve maximum efficiency, resources must be shifted between the industries of the economy. That's why, when the country is open to free trade, it can specialize in the products in which it has a technological advantage. Production, for example, can be shifted to industries which use the countries most available resources. Or, it can be shifted to the industries in which the country as relatively less demand than the rest of the world. Another thing to consider is to shift to industries, which use economies of scale in production. If one of these suggestions is performed in practice (as it has been done many times), total production will rise, which will be demonstrated by increase in GDP. Furthermore, consumption efficiency will improve meaning that consumers will have more available products at a lower price.

Hong Kong represents an impressive example of how minimal protectionism can be used to benefit the economy of a country. Today, Hong Kong's economy is one of the wealthiest in the world. However, after World War II, the economic situation in this British colony was almost hopeless. It received no aid for assimilation of refugees and reconstruction of economy. Yet, Hong Kong established a policy of no tariffs on imports, no subsidies to exports, minimum regulations and low taxes. Amazingly, the maximum tax in Hong Kong does not exceed 15%.

And look at the results. In 160, per capita GDP was $,47. By 14, it had increased 8 times'to 17,8. Today, Hong Kong's GDP is only 5% lower than that of the USA. Clearly, free trade polices represent some of the most efficient ways to govern any country's economy. A Harvard study demonstrated that among nations with open policies during the same 0-year period an average annual growth of .% was demonstrated, while those with restrictive policies only witness a growth of .7% annually. These facts must stand as a proof to longevity and mightiness of the free trade policies.

In conclusion, America should view free trade as an opportunity to grow even more prosperous in an expanding world economy'an economy inspired by America's example, not confused by America's contradictions. Establishing free trade areas in which the United States drops its trade barriers to countries that do likewise is a step in the right direction. But ideally America should follow the policy that best ensures the greatest freedom and prosperity for Americans It should establish complete free trade, on a unilateral basis if necessary.

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