The advantages and disadvantages of Protectionism

CONTENT

INTRODUCTION ..3

THE THEORETICAL PART ..4

1. The Historical aspect……………………………………………………….4
1. History of Protectionism…………………………………………….4
2. History of Free trade………………………………………………...7
2. The concept and essence of free trade and protectionism……………….…9
1. Definition of protectionism……………………………………….…9
2. Definition of free trade……………………………………………..11
3. The advantages and disadvantages of Protectionism……………………...13
1. The Advantages for Protectionism………………………………....13
2. Disadvantages of Trade Protectionism……………………………..15
3. The Advantages for Free Trade………………………………….…17
4. Disadvantages of Free trade………………………………………...20

THE PRACTICAL PART…………………………………………………….….23

Why Free Trade Is Far More Preferable Than Protectionism

on the USA example……………………………………………………………..23

CONCLUSION…………………………………………………………………...29

References……………………………………………………………………..….31

 

INTRODUCTION

What is better - protectionism, which allows the development of national Economy, or free trade, which develops on the basis of free market forces and identifies the most competitive industries in the country? The problem of free trade and protectionism is one of the most important and relevant topics for today.

Between protectionists and advocates of free trade is a long-standing controversy. Mercantilists, who first applied to the analysis of foreign trade and saw it as a source of wealth of the state, were, however, opponents of protectionism – a system of measures to stimulate the national economy and its protection from foreign competition. First economists who favored free trade, became a French physiocrats. They denied any productive role of trade in the increasing wealth of the nation. English classics were the most consistent defenders of economic liberalism in general and international trade in particular. They not only developed a coherent theory of foreign trade, but also offered a specific policy in this area. In the XX century as a result of war and economic crises, occurred a significant strengthening of protectionist ideology and practice, and now it is one of the important elements of international economic relations.

Probably now is no more pressing problem for our economy than the revival of the national production, increase of the modern competitive products.

The purpose of this work is to review modern protectionist and free-trade tools and techniques, advantages and disadvantages, analyze the nature of the two directions of the economy, as well as consideration of the comparative characteristics of those directions. Make a comparative analysis of free trade and protectionism on the example of several countries.

 

THE THEORETICAL PART

1. The Historical aspect
1. History of Protectionism

Historically, protectionism was associated with economic theories such as mercantilism (that believed that it is beneficial to maintain a positive trade balance), and import substitution. During that time, Adam Smith famously warned against the "interested sophistry" of industry, seeking to gain advantage at the cost of the consumers.

With a light hand of Adam Smith protectionism XVI-XVIII centuries, became called as mercantilism. Although today there are two different definitions - protectionism and mercantilism, but economic historians regard to the period XVII-XVIII centuries. put an equal sign between them. A historian P. Bayroh said that since the 1840s. Mercantilism was called protectionism.

In XVIII century. Protectionism was the dominant doctrine, recognized by leading European countries: Great Britain, Prussia, Austria and Sweden. In XIX century. replaced protectionism came doctrine of free trade, was initiated by the United Kingdom. However, in this period there were many supporters of protectionism. Among the economists who developed this doctrine, the most famous is the Friedrich List (Germany). Other economists: Henry Carey and Alexander Hamilton (USA), Jean-Antoine Chaptal and Charles Dyupen (France), Adam Muller (Germany).

Widespread transition to a policy of protectionism began in continental Europe in the late XIX century, after a long economic depression 1870-1880's. After this depression is over, and in all countries, this policy, experienced rapid industrial growth. The U.S. protectionism most actively carried out in the period between the end of the Civil War (1865) and the end of the Second World War (1945), but in an implicit form lasted until the end of 1960. In Western Europe, the transition to universal tough protectionist policy took place at the beginning of the Great Depression (1929-1930 gg.). This policy continued until the end of 1960., When in accordance with the decisions of so-called. "Kennedy Round" of the U.S. and Western European countries had coordinated the liberalization of foreign trade.

Most mainstream economists agree that protectionism is harmful in that its costs outweigh the benefits and that it impedes economic growth. Economics Nobel prize winner and trade theorist Paul Krugman once stated, "If there were an Economist's Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade'."

Cambridge University Professor Ha-Joon Chang argues that virtually all developed countries today successfully promoted their national industries through protectionism. Chang points to the significantly high tariffs of the UK, the US and other countries during their process of industrialization. While noting the success of protectionism, Chang has attempted to argue that it would be unfair if the developed countries now re-instituted protectionism by stating that those countries that used protectionist policies during their growth would be trying to "kick away the ladder" from developing countries. In the words of 19th century German economist, Friedrich List:

“It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations. Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth”.

The British economist John Maynard Keynes (1883–1946) grew up with a belief in free trade; this underpinned his criticism of the Treaty of Versailles in 1919 for the damage it did to the interdependent European economy. After a brief flirtation with protectionism in the early 1930s, he came again to favor free trade so long as it was combined with internationally coordinated domestic economic policies to promote high levels of employment, and international economic institutions that meant that the interests of countries were not pitted against each other. In these circumstances, "the wisdom of Adam Smith" again applied, he said. 

2. History of Free trade

The history of free trade is a history of international trade focusing on the developments of open markets.

It is known that various prosperous world cultures throughout history have engaged in trade. Based on this, theoretical rationalizations as to why a policy of free trade would be beneficial to nations developed over time. These theories were developed in its academic modern sense from the commercial culture of England, and more broadly Europe, in the past five centuries.

Before the appearance of free trade doctrine, and continuing in opposition to it to this day, the policy of mercantilism had developed in Europe in the 16th century. Two early British economists who were opposed to mercantilism were Adam Smith and David Ricardo.

Economists that advocated free trade believed trade was the reason why certain civilizations prospered economically. Adam Smith, for example, pointed to increased trading as being the reason for the flourishing of not just Mediterranean cultures such as Egypt, Greece, and Rome, but also of Bengal (East India) and China. The great prosperity of the Netherlands after throwing off Spanish Imperial rule and pursuing a policy of free trade made the free trade/mercantilist dispute the most important question in economics for centuries. Free trade policies have battled with mercantilist, protectionist, isolationist, communist, populist, and other policies over the centuries.

Trade in colonial America was regulated by the British mercantile system through the Acts of Trade and Navigation. Until the 1760s, few colonists openly advocated for free trade, in part because regulations were not strictly enforced—New England was famous for smuggling—but also because colonial merchants did not want to compete with foreign goods and shipping. According to historian Oliver Dickerson, a desire for free trade was not one of the causes of the American Revolution. "The idea that the basic mercantile practices of the eighteenth century were wrong, wrote Dickerson, "was not a part of the thinking of the Revolutionary leaders".

Free trade came to what would become the United States as a result of American Revolutionary War, when the British Parliament issued the Prohibitory Act, blockading colonial ports. The Continental Congress responded by effectively declaring economic independence, opening American ports to foreign trade on April 6, 1776. According to historian John W. Tyler, "Free trade had been forced on the Americans, like it or not."

The British economist John Maynard Keynes (1883–1946) grew up with a belief in free trade; this underpinned his criticism of the Treaty of Versailles in 1919 for the damage it did to the interdependent European economy. After a brief flirtation with protectionism in the early 1930s, he came again to favour free trade so long as it was combined with internationally coordinated domestic economic policies to promote high levels of employment, and international economic institutions that meant that the interests of countries were not pitted against each other. In these circumstances, "the wisdom of Adam Smith" again applied, he said.

The Fall and Rebirth of Free Trade. Due to periods of economic instability, and the devastating impact of World War I, many of the free trade policies that had existed at the turn of the last century were eventually canceled in favor of protectionism and autarky. This lasted for around 20 years until the end of World War II and the establishment of the Breton Woods system. Breton Woods standardized trade policies and exchange rates, allowing countries to once again freely trade with one another without fear of economic chaos. This created ever-increasing trade volumes within the areas not under control of the Communist bloc.

Contemporary Free Trade. When the Soviet Union fell in 1989, the remaining closed markets in Eastern Europe opened up to trade, making a global free trade system once again possible. Free trade accelerated during the 1990s and the beginning of the 2000s, resulting in our current globally interconnected economic system.

 

2. The concept and essence of free trade and protectionism
1. Definition of protectionism

Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow (according to proponents) "fair competition" between imports and goods and services produced domestically.

Protectionism is an economic policy which is meant to benefit domestic producers of goods and services. In a nation with protectionist policies, domestic producers are insulated from competition against foreign firms by a series of barriers to import. They may also be supported directly by the government with the use of subsidies. The opposite of protectionism is free trade, in which goods are freely permitted to cross borders. Many nations support free trade, and would prefer to see protectionist economic policies barred altogether. Signatories to the General Agreement of Tariffs and Trade (GATT) and members of the World Trade Organization(WTO), for example, are typically proponents of free trade.

The logic behind protectionism is that domestic industries may suffer when confronted with foreign imports which are available at cheaper prices due to lower cost of labor, more readily available natural resources, or foreign government subsidies which help the producers keep their costs low. By imposing stiff import tariffs and quotas, a government can theoretically increase the market for domestic goods, by essentially closing the market to foreign producers. This in turn is designed to benefit the domestic economy.

When restrictions on imports are accompanied by government subsidies to domestic companies and government export subsidies to encourage exports of domestic products, protectionism is intended to benefit domestic companies. However, this is not always the case. Thanks to the lack of competition, companies may have less interest in developing innovative new products, sticking with old inventions and technologies. They may also face export barriers, because foreign countries often respond to protectionism with protectionist policies of their own.

Individual citizens can also suffer under protectionism, because they may find that prices for goods and services become inflated. Without low-cost foreign competition, companies can afford to charge whatever they like for their goods and services, and this means that consumers may pay prices which are much higher than those paid by people in other regions of the world. They may also chafe at the lack of innovation, or lobby for a greater freedom to choose between products.

Supporters of protectionism argue that it can help nascent industries by insulating them from the open market until they are strong enough to function independently. Protectionism also theoretically protects domestic employment, by encouraging companies to hire domestically, and it can be used to promote living wages and better benefits for employees. Proponents point out that protectionism can also be used to pressure foreign nations to improve conditions for their workers.

 

2. Definition of free trade

Free trade is a system in which goods, capital, and labor flow freely between nations, without barriers which could hinder the trade process. Many nations have free trade agreements, and several international organizations promote free trade between their members. There are a number of arguments both for and against this practice, from a range of economists, politicians, industries, and social scientists.

A number of barriers to trade are struck down in a free trade agreement. Taxes, tariffs, and import quotas are all eliminated, as are subsidies, tax breaks, and other forms of support to domestic producers. Restrictions on the flow of currency are also lifted, as are regulations which could be considered a barrier to free trade. Put simply, free trade enables foreign companies to trade just as efficiently, easily, and effectively as domestic producers.

The idea behind free trade is that it will lower prices for goods and services by promoting competition. Domestic producers will not longer be able to rely on government subsidies and other forms of assistance, including quotas which essentially force citizens to buy from domestic producers, while foreign companies can make inroads on new markets when barriers to trade are lifted. In addition to reducing prices, free trade is also supposed to encourage innovation, since competition between companies sparks a need to come up with innovative products and solutions to capture market share.

Free trade can also foster international cooperation, by encouraging nations to freely exchange goods and citizens. Agreements between trading partners can also promote educational advantages, such as sending engineers to train with people in the top of the engineering field in one nation, or sending agriculture experts to rural areas to teach people about new farming techniques and food safety practices.

Opponents of free trade often argue that it hurts domestic producers by opening up competition to companies which operate in nations with less stringent labor laws. In the European Union, for example, there are specific rules about working hours, fair rates of pay, working conditions, and so forth, which drive up the cost of production for companies which operate in the European Union. By contrast, labor laws in many developing nations like Honduras are much more lax, allowing companies to produce products at low cost, because they have low overhead costs.

Free trade has also raised concerns about product safety among some consumer advocates. A series of scandals in the early 21st century involving tainted food products from China highlighted the issue of purchasing goods from countries with inefficient or incomplete regulatory systems. Other people have suggested that free trade encourages companies to relocate, because when barriers to foreign trade are lifted, domestic companies have no reason not to move operations overseas to take advantage of cheaper labor, inexpensive supplies, and lax regulatory systems.

 

3. The advantages and disadvantages of Protectionism

1. The Advantages for Protectionism

One strength of protectionism is that it keeps the domestic economy flowing. Since there is a decrease in imports, domestic firms have less competition, and so are able to continue.

The domestic economy also strengthens, because the unemployment rate will be minimal. This is because the domestic firms are able to produce and sell more goods with a lot less difficulty, giving firms less incentive to decrease its cost by decreasing its work force. The people with jobs will keep consuming, allowing a flow of the economy.

Protectionism allows the green, fledgling firms to function and develop at a decent rate, because these firms are not pressured by the foreign, more experienced firms. The fresh firms can grow until they themselves are able to complete in international markets, promising positive aspects for the domestic economy in the future.

Protectionism also prevents dumping. This is where foreign, grand economies enter an economy and sell their goods at a price lower than the costs of production. Consequently, the consumers of that specific economy are spending more, than the consumers in the overseas areas.

Protecting the Local Companies. Nowadays, trade is worldwide and with the safe and fast modern transportation, oranges from Valencia, Spain, can compete with the local crop in Greek markets, while Japanese electronics have a share of the market that Amstrad used to hold in the British market. Cheaper foreign products can have an impact on local companies, which have to drop the costs of production to keep attracting consumers. Redundancies, lower cost of production with lower quality or even bankruptcies are realistic outcomes for an economy unable to compete with foreign giants.

Managing Trade Deficit. A country's economic prosperity relies heavily on its positive trade balance: exporting more goods than importing, hence gaining more than spending. However, the consumer's preference of foreign products, combined with the local companies' inability to build strong bonds with foreign markets, results in a growing amount of imports and leads to trade deficits. Limitations on the amount of imports on certain products balances the trade artificially by forcing consumers to turn to local products.

Room for New Industries. When foreign giants hold the lion's share of a specific sector of the market, it is extremely difficult for local entrepreneurs with limited initial resources to compete with the established firms. For example, new computer software developers have to compete with multibillion-dollar corporations -- Microsoft and Apple. Protectionist policies give room for new players to build even a small consumer base, which helps them continue their operations and eventually expand.

Independence from International Instability. Certain commodities such as oil are not abundant everywhere in the world and countries are bound to be affected by crises in oil producers. However, for goods that also can be produced within the country instead of being imported, such as agricultural products, trade limitations can help in periods of international instability. Protectionist policies force the local industry to develop, and even if exporting countries are going through a crisis affecting their production or trade, consumers won't be affected.

 
 
 

 

2. Disadvantages of Trade Protectionism

The main disadvantages of protectionism are:

• The local firms are being protected and they are competing on price not the quality
• The artificial protection can work well for the products inside the country while it is of new use when the products will be exported; it’s a false sense of security.
• The consumers will be denied an easy access to high quality products.
• It is against the principle of free markets.

Trade protectionism has several disadvantages, the most significant of which are the strains it places on the very principles of free trade. Further disadvantages are the protections it offers to firms that compete on a platform of price over quality, the false sense of security that it builds and the denial of easy access to certain products for consumers.

At the core of protectionism are tariffs, duties, inventory quotas and any other measures designed to restrict the import of foreign goods in interest of protecting domestic companies from foreign take-overs. Additionally, some governments provide subsidies and loans to businesses that are failing to compete against their foreign competitors. These actions shackle the free market by offering benefits to domestic companies while imposing consequences upon foreign businesses. Some people consider trade protectionism to be a step toward anti-globalization for this very reason.