Theories for and against protectionism

2. Theories for and against protectionism
3. Use economic theory and empirical evidence to explore the statement that ‘free trade or regional economic integration is superior policy approaches to that of protectionism.’

Free trade reveres to a trading system where the trade of goods and services between different nations takes place without being interfered with by the government interventions and restrictions. Example of these government interventions are tariffs, taxes and some non-tariff barriers such as quotas, regulatory legislation and the inter-government trade agreements like the agreement between North America referred to as North America Free Trade Agreement (NAFTA) and the central America agreement which is referred to as Central America Free Trade Agreement (CAFTA). Economic integration usually breaks all such barriers. On the other hand, is the protectionism which is an economic policy that restricts trade between countries. The tools used in protectionism include; high tariffs on exported and imported goods, stiff government regulations to discourage imports, anti-dumping laws, and regulations, which are usually designed to protect domestic companies from foreign competition and introduction of restrictive quotas. Protectionism referrers to the doctrines and policies that are put into place to “protect” the businesses that are located within a particular country through the regulations and restrictions of trade between the country and the foreign nations.

Theories for and against protectionism

The infant industry

This is one of the theories that argue in favor of the protectionist policy. This theory is based on the concept of protecting the new firms from foreign competition to give them space for growth without tight competition from foreign established companies. This theory is mostly a suggested solution when addressing the market failures facing the new businesses in the market, especially to the developing countries. When these new firms are given some protection by the state, it makes it possible for them to produce goods and services at a lower cost without any competition, which is an important factor that results in the firms to thrive within a very short period of time.

This theory has many objections, such as the government deciding on the industries to protect and the method they are going to keep the other companies off. The government may get involved by reducing the production cost of these firms, and by protecting them from foreign competition, these companies get an avenue to introduce their products to the market and thrive. It involves increasing the import duty for the foreign companies resulting in most of the companies to quit the process due to low profits and also losses. Industrial policies and tariffs are also other tools that are used by some countries, especially during the early stages, when a company is in the development stages.

Without the protectionism concept, the growth of new firms in the market will be very troublesome, which might eventually result in their downfall. The protectionism is a policy that plays a big role, especially to the developing countries, because most of them are not usually in a position to produce their product at low prices, especially when compared to the products imported from the developed countries. Despite all the input from the theory, there are so many companies that have not been in a position to stand the local competition to become international companies; due to these reasons, the theory has faced critics due to the negative results.

The ‘new’ Trade Theories

This theory emerged in the 1980s, which gives credence to the concept that the government is capable of shaping the comparative advantage of certain firms is a strategic argument for protecting the local industries from foreign competition. This theory suggests that it is the role of the government to execute policies that protect their new firms.

The political economy theory

The trade liberalization concept creates the loser and the winner present in the short term when the resources are deployed from the competitive sectors. Even if the whole economy is likely to benefit, the distribution of the losses and gains is always uneven. The gains received are usually divided among many consumers, but the losses are mostly concentrated to a small number of foreign competing industries to make their impact felt more acutely.  There are numerous ways that can be used to protect the local firms though some of these protection tools are very difficult to remove. It is important to recognize that despite protecting the new firms, there is also a huge loss of jobs from outsourcing and offshoring. There can be some chances of a perceived trade-off among the free trade and the job sector in the country.

From the research that was carried out in the US, despite many people losing their jobs, the outsourcing process in the country was connected to the overall increase in employment as a result of the US films trying to create jobs in the US and in the oversees.  It is an important step to communicate well on the overall importance of the trade process in order to work against the protectionist demand. The government might weigh the concerns of the producers in comparison to the impact of the process on the importers and consumers even though it would be adversely affected by the protection. Most of the time, the protection policy is seen as a free policy, although it has some long-term cost to the consumer and the firms that are involved in the import of raw materials for production and also reduce the competitiveness in the market.

The adjustment cost theory

The cost of the factors of production can be adjusted by the short term cost of liberalization because the factors of production are unable to quickly re-deploy because of the imperfect working markets.   In the developing countries characterized by perceiving failures of the market, cost adjustment is significant. The cost adjustment does not provide a justification for protection. Once the protection tools are put in place, it is very difficult to remove the measures after your goals are achieved.

Arguments for and against Free trade/regional economic integration theories

Classical and Neoclassical theory

This theory embraces the free trade concept as the most appropriate in any country. According to Ricardo, free trade is advantageous because it allows a country to engage in the specialization of products, which requires some relatively few input factors. This concept is based on the principle of opportunity cost and states that all the nations, including the ones that are poor in producing the goods and services to benefit from the trade.

This theory states that a nation will export the goods they need as input for the production of goods such as; land, labor, and capital they have in surplus and at the same time import the goods that they require mostly as the input in the production process that is scarce in their region. This enables the prices of the produced goods and the return on the production factor to reach the world price or the equilibrium. The political reason for this insight is to remove the trade restrictions such as the tariffs, quotas, and national subsidies where it is possible because they reduce the overall welfare resulting in inefficient production.

The institutionalist theory

This theory holds up huge support to free trade. The theory embraces the active role of state management in economic development and the fear of opening up the country’s economies to the rest of the world very fast, which might interfere with the trading plans. The national indicators such as the balance of payment, manufacturing share, and the national exchange rate of the currency might become an important issue than the welfare of the customer’s benefits.

In this theory, there is the use of the metaphor “kicking away the ladder.” The argument is that there was a time when the British economy had embraced the protectionist and tariff policies before changing to the free trade policies, which involved trading with the other countries, including the ones that are underdeveloped for the gain of the two nations.

The ecological theory of free trade

The ecological economists embrace free trade due to different reasons. The first reason is that the shipping process of the goods around different places of the world does not account for the emission of gasses to the environment, which contributes to the destruction of the biosphere around the transport routs. From the environmentalist point of view, it is most preferable that countries produce and consume their products locally instead of getting involved in the production chain, which has unmeasurable impacts on the environment.

The second argument is that free trade results in breaking the local environment protection laws. The reduction of the non-tariff barriers might include even the environmental protection laws, which will result in the foreign countries involving in all the manner of activities, including the use of energy sources that are a threat to the environment. The other concern of this theory is that foreign products might result in interfering with the environment through their packages such as the cans and the plastic bags.

An overview of free trade and protectionism

The view of free trade suggests that as a country, it is important to make the trading process between countries easy to create wealth and also create a good relationship while the protectionism concept states that it is better off to protect the local industries from the foreign competitors to give then room to thrive. The protectionist policy is not concerned with the relationship issues between the nations with the others in the region. There are different perceptions from different economists on the issue of restrictions, although they also give some guidelines because these steps could result in a nation being poor than the initial state.

The key argument on free trade and the protectionism

Free trade encourages the development of the countries’ economy, unlike the protectionism-free trade that enables goods and services from every part of the world to be sold in the nation, which creates employment to the locals as well as increase the rate of customer satisfaction. The protectionism limits entry of foreign products in the name of protecting the local industries, which at some time may not be in a position to generate enough revenue to the country is resulting in more poverty in the name of restriction.

Free trade reduces the non-tariff barriers, which reduces the trading cost resulting in an increase in foreign investment in a country. It also reduces the price of goods in a significant percentage because there is a variety of goods, unlike the protectionism, which puts emphasis on local consumption despite the quality and price. Protectionism limits the consumers on one variety of products creating boredom in the consumption process.

Protectionism policy in most of the cases might result in destructive trade wars that increase the cost of products in the name of protecting the local industries. Free trade results in unity in the region and makes sales of foreign goods legal in the nation at affordable prices for the consumers to choose.

Conclusion

Protectionism benefits the exporting sector though only in the short run. This theory imposes an extra cost to the consumers and producers who use imported products and at the same time, interferes with the country’s trading partners negatively. In the long-run of using this concept, the competitiveness of the trading process is significantly affected. The effective way for any country would be the adoption of the free trade policy, which encourages interactions between the nation and the rest of the world. Free trading is against the selfish interest of the protectionism

Any country’s decision to adopt protectionism would be a selfish step that is doomed to fail the country into some economic crisis. Free trade is the concept the results to economic development in any country and at the same time, consumer satisfaction. Once the tariffs are imposed on the other countries, it also becomes very difficult to remove them when the need arises, which makes a country face isolation due to a lack of trading partners in the future.