Analysis of Free Trade Versus Protectionism

When it comes to looking at what kind of trade arrangement a country should seek to achieve economic growth, there are various debates favoring each side: free trade and protectionism. Free trade is when goods and services are traded between countries with as few limitations or restrictions as possible, while protectionism is when a country imposes restriction, or tariffs, on trades to protect its local industries or companies from international competition. How does protectionism affect the global market? Are countries with less protectionism or countries with more protectionism going to do better? The answers to these questions are more complex than one would think as this is very controversial due to the fact that there are many people who support each method. Protectionism, either many restrictions or fewer ones, affects the global market in many ways for both the one imposing the tariffs and the ones getting imposed on. This paper will talk about the advantages and disadvantages of both protectionism and free trade, which will also be shown by countries that enforce each trade arrangement, and it will discuss which method is the best one for a country to use to help them achieve economic growth.

When free trade agreements are made the countries involved are able to merchandise their goods and services with more liberty between each other. Free trade offers consumer access to a greater level of ability and expertise, because companies that conduct international affairs have more access to information that allows them to create more effective and, after finding the best practices, more economic products or services. This trade agreement also cuts down government expenditures, this is due to the fact that governments protect their local industries through the use of subsidies to assist them. Meaning that by trading freely, less money needs to be provided by the government to keep prices affordable, and can be spent on other needs that a society may have. Another free trade advantage is that it allows technology transfer so local companies also receive access to the latest technologies from multinational partners. Even if free trade does have these and many more advantages, it also has a few disadvantages. One of the consequences that this trade agreement has is that it causes employment opportunities to be outsourced. This is due to the fact that international workers are more experienced, cheaper or are willing to work with fewer safety protections, meaning that local workers would be companies’ second choice. Free trade can also encourage the theft of intellectual property as intellectual property rights may not be taken as seriously by foreign governments as they are domestically. Another disadvantage of free trade is that it can cause deterioration of natural resources as emerging market countries usually don’t have many environmental protection and free trade leads to reduction of natural resources. The world’s largest free trade agreement is the North American Free Trade Agreement, also known as NAFTA. This is an agreement established in January 1994 between Canada, United States and Mexico. The purposes of this agreement was to expand trade between these three countries and to make them more competitive in the global marketplace. The greater trade this agreement brought to these countries increased the economic output of each. While NAFTA has been wildly successful completing its purposes, its also has had various downs. The agreement’s biggest problems are that it has been accused of taking U.S. jobs, many Mexico’s farmers have been put out of business and it has exploited Mexico’s environment. This example shows how even if free trade can be very successful and promising for a countries economic growth, its comes with a cost that each country must be willing to pay to get the advantages.

As stated before, protectionism is the type of trade that countries that want to protect their domestic industries from international competition by imposing restrictions on imports use. Like free trade, protectionism has both advantages and disadvantages. An advantage of protectionism is that it reduces economic gaps in income and resource inequality by establishing protections on domestic goods and services. This trade method also protects and helps build up new industries, it is difficult for new industries to compete if there is no support from government with the international competition, meaning that by applying tariffs to imported goods these local industries are being shielded. Protectionism also creates income for the government, through the tariffs, that are used to fund government affairs or needs. Being disadvantages protectionism has many. One con of this type of trade is that it usually raises prices of the products instead of lowering them. Due to tariffs being implemented, foreign goods cost more and domestic companies raise their prices to match those of foreign goods and make the same amount of money as them. Protectionism can also create bad international relationships between countries, as wars are more likely to start due to protectionism because there are less opportunities for different nations to help each other grow economically and achieve power in the global market. If countries depend of each other for their economic well being, they are less likely to go to war against one another. Adding tariffs to import goods also limits customer choice because international goods may not be supplied to the local market, or can be supplied but the prices may be out of the reach of the average consumer. Protectionism can be seen in the big trade war that is currently going on between United States and China, that started when United States implemented tariffs in Chinese goods. President Trump started with applying tariffs on steel and aluminum but this caused lost to many more countries that import these metals to the U.S. On July, 2018, Trump set a tariff of 25% on 818 categories of chinese goods, which caused China to accuse United States of starting a trade war. This shows how tariffs are applied to reduce trade deficit, but it ruins relationship and can actually result in increase of taxation.

Finding the answer to which trade agreement would be more favorable for a country to apply is very complex, as two countries can have completely different trading methods that work perfectly for each its own. But due to the research done for this paper, I believe that free trade is the best way to trade. Data on import tariffs, compiled by the World Bank and World Trade Organization in 2016, showed that the top three countries with the highest import tariffs were the Bahamas (18.56%), Gabon (16.93%) and Chad (16.36%). The data also showed that the top three countries with lowest tariffs were Singapore, China and Switzerland, all with a weight mean applied tariff of 0%. This implies that less developed countries are the ones who tend to have the highest trade barriers, while the developed countries usually are less restrictive with the limitations of the goods they trade. Free trade agreements allow countries easier access to more markets in the global economy. High tariffs only protect domestic industries in the short term. But, in the long term, global corporations will hire the cheapest workers wherever they are in the world to make higher profits. As stated in previous paragraphs, both protectionism and free trade come with advantages and disadvantages, and each country decides which disadvantages they are willing to take to get the advantages. Protectionism seems to have far more and worst disadvantages that those of free trade, meaning that seems like the way to go.

Works Cited

1. World Trade Organization. (n.d.). Understanding the WTO: What is the WTO? Retrieved from https://www.wto.org
2. Bhagwati, J. N. (2002). Free trade today. Princeton University Press.
3. Irwin, D. A. (2017). Clashing over commerce: A history of US trade policy. University of Chicago Press.
4. Rodriguez, F., & Rodrik, D. (2001). Trade policy and economic growth: A skeptic's guide to the cross-national evidence. In B. S. Bernanke & K. Rogoff (Eds.), NBER macroeconomics annual 2000 (pp. 261-338). MIT Press.
5. Baldwin, R., & Evenett, S. (2009). The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20. CEPR Policy Insight, 40.
6. Baldwin, R. (2016). The great convergence: Information technology and the new globalization. Harvard University Press.
7. Rodrik, D. (2018). Straight talk on trade: Ideas for a sane world economy. Princeton University Press.
8. Hufbauer, G. C., & Schott, J. J. (2005). NAFTA revisited: Achievements and challenges. Peterson Institute for International Economics.
9. Manova, K. (2013). Credit constraints, heterogeneous firms, and international trade. The Review of Economic Studies, 80(2), 711-744.
10. World Bank. (2019). World Development Indicators 2019. Retrieved from https://databank.worldbank.org/source/world-development-indicators