Free Trade versus Protectionism
The mutual benefits that international trade can provide to all countries participating in it are obvious. To see how countries gain from trade, we can use a very simple example which involves only two countries. Because of the difference in their climatic conditions. one can produce oranges and the other apples. Without trade, people in each country would be restricted to the consumption of only one kind of fruit. With the free exchange of goods between them, they have the choice between oranges or apples.
Since countries have different quantities of various productive resources, it is necessary for them to distribute them among themselves. Thus, for example in country A, labour may be scarce and expensive, but capital is plentiful, while in country B it may be the other way round. It will then be natural for country A to utilise the cheap labour of country B, and for country B to make use of country A’s surplus capital. This makes it easy to see how specialization – more detailed division of labour – among nations becomes possible.
The advantages of trade make it possible for each nation to participate – in different degrees – in the global production of goods. Japanese cars, Italian shoes, Swiss watches, and Russian vodka are available all over the world.
Despite the apparent benefits of international trade, governments have erected a variety of barriers to free trade over the years, so that economists sometimes seem to stand alone in their defense of the principle of free trade.
The major arguments against free trade are centred on the defense of some national interest: the protection of the country’s economy or the defense of the national security. The protection of the infant industry is a popular argument for protection. The idea is that the government should allow emerging industries to grow in a market protected from harsh international competition. Protectionism can be justified to a certain extent – on economic grounds – still it is not the best policy. Consumers will have to pay higher prices, and subsidies provided to the industries that the government wants to protect may be used inefficiently. Some European governments provide massive subsidies to many of their basic industries at a far higher cost than can be justified by the benefits.
Another argument for protection is the employment argument. Advocates of protectionism argue that employment in certain industries is threatened by foreign imports, and it is the government’s duty to provide assistance to these industries by imposing protective tariffs or setting import quotas. But if we cut back on imports, then output and employment in our export industries will also fall in the long run. And worse, protection discourages workers and managers from adjusting to the realities of foreign competition.
Political considerations will often induce governments to impose embargoes. The problem with embargoes is that they can easily backfire. An embargo may be almost as damaging to the country that imposes it as to the one on which it is imposed. The smaller a country – the more vulnerable it is to embargoes, while big nations are not very sensitive to them. More important, however, is the fact that effective embargoes are rare. Quite often nations disregarding these trade restrictions may benefit from an embargo against a country.
Despite the advantages that free trade can give and the difficulties that tariffs, quotas and embargoes can cause, most governments have imposed a vast number of restrictions on international trade around the world. The reason for this is that countries are not in the same economic situation, and they will formulate their policies in their own best interests. Thus, as long as there are economic inequalities and conflicting interests between the nations, the interpretation of the freedom of trade will be different.
The majority of economists believe in the comparative cost principle, which proposes that all nations will raise their living standards and real income if they specialize in the production of those goods and services in which they have the highest relative productivity. Nations may have an absolute or a comparative advantage in producing goods or services because of factors of production (notably raw materials), climate, division of labour, economies of scale, and so forth.
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