One of the greatest international economic debates of all time has been the issue of free trade versus protectionism. Proponents of free trade believe in opening the global market, with as few restrictions on trade as possible. Proponents of protectionism believe in concentrating on the welfare of the domestic economy by limiting the open-market policy of the United States. However, what effects does this policy have for the international market and the other respective countries in this market? The question is not as complex as it may seem.
Both sides have strong viewpoints representing their respective opinions, and even the population of the United States is divided when it comes to taking a stand in the issue. After examining all factors on the two conflicting sides, it is clear that protectionism, from the side of the United States, is the only way the American industrial economy can expand for the benefit of its citizens and for its national welfare. The economy needs to get itself out of the huge deficit hole that it has created for itself, and lean towards protectionist measures.
The dictionary definition of free trade states it as a policy of allowing people of one country to buy and sell from other countries without restrictions. This idea originated with the influential British economist, philosopher, and author of The Wealth of Nations, Adam Smith. He inspired the writings of great economists such as David Ricardo, Karl Marx, Thomas Malthus, and others. According to Smith, specialization and trade is the best solution to create a flourishing American economy, with its industries ruling the economic world. William H.
Peterson, holder of the Lundy Chair of Business Philosophy at Campbell University, agrees with Smiths philosophy. He states that the idea of free trade allows the efficient use of economic resources and will promote international cooperation. One of the biggest examples of international cooperation is the Bretton Woods system that originated from a 1944 conference at Bretton Woods, New Hampshire. Those participants in this conference created three organizations to help regulate the international economy. The first is the International Monetary Fund (IMF) which was established with the idea of regulating monetary policy.
One of the benchmarks of the IMF is the stabilization of exchange rates and the loaning of money to help stabilize countries with balance of payments deficits. The second organization established was the General Agreement on Tariffs and Trade (GATT) whose main focus was on a liberal trading order. Their mission was to reduce trade barriers on manufactured goods and to build-up the principle of most-favored nation (MFN) status. This would impose a sense of fairness between countries in that each was required to levy the same low tariffs on each others imports.
The third and final organization sponsored by Bretton Woods is the World Bank. The World Banks most ambitious aim was the fostering of economic development. This is accomplished through loans to struggling countries. In addition to the World Bank, the International Finance Corporation was annexed to provide loans to corporations who are seen to help aide in poor countries development. These three organizations within the Bretton Woods agreement captured the cooperation of the global community due to the one thing they all found in common: a commitment to a free market and economic freedom.
In the 17th and 18th century, the American revolution was triggered by the Sugar Act of 1764 and the Stamp Act of 1765. The Sugar Act imposed import duties on foreign molasses, sugar, wine, and other commodities. The Stamp Act provided a tax on all important documents, periodicals, almanacs, pamphlets, and playing cards. The colonists believed that these control practices were unfounded since they advocated No taxation without Representation. These protectionist measures contributed to the conflict which led to the American revolution. Similarly, protectionism also led to the Civil War.
During the Civil War era, the industrial North was goading the agricultural South through the highly disputed Tariff of Abominations of 1828 and 1832. This high tariff protected the northern manufactures while the South demanded a low tariff in order to trade its cotton for cheap foreign goods. Eventually, these conflicts led to issues of secession, which thus led to the Civil War. Through these examples, Peterson argued that protectionist movements have never succeeded in the past, which means that they will not succeed in todays economy.
Peterson seems to have forgotten several factors in his analysis. Even though it is correct to use mistakes of the past economies as examples, he has forgotten the fact that the international economic climate is continually changing and is blatantly different from how it was during the times of the American Revolution and the Civil War. Peterson is using positive analysis by looking at what will happen to the US economy and the international economy, rather than looking at the issue using normative analysis and seeing what should happen.
What should happen should be seen in respect to the conditions of the modern American economy and the international market. What may have happened with past protectionist measures does not necessarily mean that similar conflicts will repeat in the present. By tightening the laxity of the American free trade policy, wars should not occur. Quite the opposite, wars will be prevented by eliminating the tenacious competition between the United States and the other nations. One major strategy used to manage trade differences between countries is regular economic summits among leading industrial nations to create economic policies.
These economic summits were born in 1975 from the ideas of French President Valery Giscard dEstaing who was looking for a solution after the demise of the Bretton Woods system and saw the need for international economic stability. These summits are held yearly with growing participation from the global community. The main goals at these summits is global economic stabilization within the context of important political issues. Brink Lindsey, a trade attorney in Washington DC, also believes that free trade will benefit the United States economy.
According to Lindsey, not only will producers benefit from free trade, but consumers will as well. The US industries will benefit from foreign markets and the drive for competition, so free trade should become the cornerstone of American policy. One of the most important trade agreements of the twentieth century that reflects this viewpoint is The North American Free Trade Agreement (NAFTA), which was signed in August of 1992 and involved the U. S. , Canada, and Mexico. This agreement seeks to remove tariffs and other trade impediments in automobiles, energy, agriculture, banking, advertising, textiles, and other areas.
Its main initiative is to enhance prosperity in all three countries, which encompasses 370 million people. The United States may have come out victorious during the Cold War, but now the military competition has been replaced by economic confrontation (mainly between the US, Europe, and Japan). A good example of the tensions between the United States, Japan, and Europe can be best seen in The Uruguay Round which lasted from 1986-1993. The Uruguay Round addressed some explosive issues such as rules for governing intellectual property rights, non-tariff barriers, agricultural subsidies, and trade in services.
Few issues such as these ignited great hostility between these three nations as these did. But by far the most controversial issue was that of agricultural subsides because it is deeply imbedded in the domestic politics of most every nation. Efforts to reduce agricultural subsidies were violently opposed by Japan and Europe, especially France. In 1992, following these aggressions, the US and Europe marginally escaped a trade war because of US retaliation consisting of the increase of tariffs on European exports like wine and of Frances refusal to accept any measure of change.
The Uruguay Rounds most important contribution was a powerful new World Trade Organization (WTO) which replaced the outdated GATT organization. Its main function is to set up three member arbitration panels to decide if countries are violating the agreement, make them correct such violations and pay for damages, and even authorize retaliation against violators. Even though America seems to be the only country with a free trade policy, Lindsey argues that this statement is untrue. Import barriers are falling in different parts of the world, including Japan.
Between 1968-1988 import growth has skyrocketed several times faster for Americas leading trading partners. Merchandise trade among the developed countries more than quadrupled between 1963-1973; increased over two and a half times from 1973-1983; and grew almost one and a half times again between 1983-1986. From 1960-1986, the percentage of GDP derived from trade (exports plus imports) doubled to 14. 4 percent in the US, gained an average of 63 percent in the EC countries, and remained constant in Japan at 17. 3 percent.
Specifically, import rises in Japan and West Germany has been almost as large as that of Americas. Even though other countries may be letting down their import barriers, it is not necessary for the United States to follow suit and further open its doors of economic trade. The American industrial economy is self-sufficient and does not need to rely heavily on the products of other nations. A good example of the United States shutting its doors to economic trade is the collapse of the Bretton Woods system. The dismantling of the system is a direct result of the actions of the United States, namely the Nixon shock.
This refers to the announcement made by the Nixon administration in 1970 in which the administration concluded that it could no longer justify the expense of subsidizing global trade. The administration saw a direct correlation between the inflation and balance-of-payments deficit that was plaguing the US and the unfair advantage the US provided for its self in subsidizing global trade. The administration believed the only way to combat Japanese and European discrimination against US exports, was to break away from fixed exchange rates.
The United States is a capital-intensive country, meaning that its inputs consist mostly of machinery, in contrast to labor-intensive countries in which labor controls the output of the economy. For example, in 1970 the labor costs of the US and of West Germany were twice that of Japan. By 1986, the labor costs were comparatively equal. Also in 1970, US manufacturing productivity was 58 percent greater than West Germany and 105 percent greater than Japan. By 1986, these figures had fallen to 20 percent and 2 percent, respectively.
The United States is far advanced and leading in technological development, by concentrating on the efficient output of its capital goods. Only 30,000 of more than 3. 5 million patents were held by citizens of developing countries. David Ricardo, an American economist, speaks on the same side as Lindsey when he states that all countries benefit from specialization and trade. Trade has potential benefits for all nations. Tariffs, export subsidies, and quotas simply interfere with the movement of goods and services around the world.
This idea can be illustrated in the exemplary situation where the addition of a $1 tariff on imported textiles leads to the loss of efficiency. This $1 tariff has led to two components. First, consumers must pay a higher price for goods that could be produced at a lower cost. Second, marginal producers are drawn into textiles and away from other goods, resulting in inefficient domestic production. In the situation above, Ricardo shows that trade barriers only prevent a nation from taking advantage of the benefits of specialization (the idea of concentrating on a single or few tasks).
Instead, the American economy is pushed to adopt relatively inefficient production techniques, and consumers are forced to pay higher prices for protected prices than they would otherwise pay. For example, trade barriers in twenty-one US industries saved 191,00 jobs at a cost to consumers of $170,00 per job. Along with Ricardo, the vast majority of American economists are also in favor of free trade. Among them is W. Allen Wallis, who stated in the Department of State Bulletin that the idea of protectionism only invites a spiral of retaliation.
Protectionism raises the cost of living in the country introducing protection and even though a favored group can benefit from it, the vast majority of the population will not. Domestic consumers will be forced to pay higher prices. Wallis additionally states that protectionist measures are not really actions taken by one country vs. another country. Instead, they are actions that benefit one domestic group at the expense of other groups in the same country. For example, there is a conflict between the opinions of producers vs. consumers, and import-competing industries vs. export-competing industries.
Wallis is correct in saying that controversies do exist over protectionism, but the controversies are merely enhanced in a free trade/laissez-faire economy. In this type of economy, the free market answers the basic economic questions (what to produce, how to produce, and who gets what is produced). Because the system of free enterprise has no government regulation and allows individual producers to decide its own actions, problems tend to arise with the absence of regulation. First, inefficiencies tend to exist. Producers do not always supply what people want at the lowest cost.
Second, income may be unevenly distributed and leave out some groups. Third, periods of unemployment and inflation can arise. Wallis also argued on behalf of the free traders about the protectionist result of retaliation. He states that if the US limits a countrys exports of a given product to the US, then the countrys ability to buy from our country is reduced. They would then have a tendency to retaliate directly against some of the United States exports. This would result in the US industries losing their export market, thus causing unemployment.
The consequences of this excess supply of labor are not on the positive side. Besides the already existing surplus, there will also be government purchase of that surplus, a higher price to consumers, and a higher price to sellers. Retaliation is a possible reaction to protectionism, but unemployment is not likely to occur. Even if the laborers will lose their jobs from the export-competing industries, the United States job sector will still have opportunities for those workers. The US has a higher rate of skilled workers than that of other countries.
In short, the United States has a higher level of productivity than other countries in the international community. John M. Culbertson disagrees with the proponents of free trade when he says that the United States is alone in supporting free trade, while other countries are putting up barriers. According to Culbertson, the other countries goal is their respective national successes. The welcoming policy of the US simply allows the other countries to take advantage of the situation. Forty years ago, the United States dominated the world economic scene.
Even though Japan constantly tried to reach its way to the top, the US was always a step or two ahead of them. Recently, though, in its quest for unregulated foreign trade, the US has left its market of success, allowing countries such as Japan to take over their foreign production markets. The US did not understand the foreign trade game, and lost. In a continuously competing global industry, the idea of pareto optimality proves to be true. It is not possible to make one country better off without making another country worse off. This idea should of been kept in mind when the US adopted NAFTA.
NAFTAs main aim was to enhance prosperity in all three countries through free trade policies, however, the goal proved to be impossible for everyone. With the devaluation of the Mexican peso, U. S. exports to Mexico drastically fell while Mexican exports to the U. S. soared, adding to the already large US trade deficit. NAFTA didnt solve the problem of loss of jobs between the US and Mexico like it intended, but rather diverted it to Asian countries. Protectionism can also save US jobs. Foreign companies cost Americans their jobs, leading to unemployment. Some countries are also guilty of unfair trading practices.
Attempts by the United States to monopolize are illegal under the Sherman and Clayton acts, but US industries continue to become victims of the effects of foreign monopolies. There is really nothing that the US industries can do about the monopoly situation. Since it has been made illegal, the US industries just have to find the best of the situation. Most US industries are perfectly competitive or monopolistically competitive. These industries have their apparent benefits, among which are the laxity of product differentiation and the easy entry and exit.
Product differentiation provides a varying degrees of new and different products while insuring that quality is high. Eventually, the demand for these products will become more elastic, as producers have less control over its prices. The more elastic the demand, the less control that industries have over price. Another factor against free trade is the fact that cheap foreign labor makes competition unfair. Most products (such as foreign-made shoes) are produced in LDCs (Less Developed Countries) where workers are paid very low and foreign industries are able to make more profit due to the cheap labor.
Most of this unfair competition is perpetuated by transnational corporations (TNCs). These corporations originate in developed countries and migrate to the Third World in search of policy flexibility that they can not find in a country such as the United States. TNCs seek cheap labor , low taxes, and few regulations. They do little for local development and they even drain the economy of the underdeveloped country, lowering their GDP. Most TNCs can be seen as leeches that reap all the benefits in a global community but contribute nothing back.
A fact that people tend to forget is that wages in a competitive industry reflects productivity. Workers in the United States earn higher wages because they are more productive. US workers are better trained and each worker has more capital per worker. Other factors in favor of protectionism are the safeguarding of national security, the discouraging of dependency, the safeguarding of infant industry, and the provision for protection during temporary currency overvaluations. If protectionism policies were to be practiced, then free trade organizations such as the WTO would be obsolete.
These organizations place a back seat to US interests and sovereignty and threaten to erode its consumer-protection and environmental regulations. Critic, Gus Tyler, agrees with protectionist measures in his book entitled Dissent. Tyler presents the idea that free trade is a myth. In the past, nations met in rounds after rounds to announce reductions of trade barriers. They then went home to make non-tariff barriers, and created subsidies to encourage exports. They negotiated VERs (Voluntary Export Restraints) or quotas, and they indulged in the most deceptive form of protectionism-the devaluation of currency.
All in all, these measures taken by nations are practically identical to tariffs, which vastly reduces consumer surplus (the ability of the consumers to pay less, an obvious benefit to them). A good example is the Tokyo Round which lasted from 1973 to 1979 and took place during an oil crisis, a deep economic recession, and rising protectionism. Tokyo sought to make tariff cuts, regulate the usage of agricultural subsides, and come to a settlement of a policy to deal with Third World countries.
But most critically, the Tokyo Round failed in curbing the practice of safeguarding which undermined all the progress and agreements made in Tokyo. The protectionist solution to the controversy of free trade vs. protectionism is somewhat hazy: mutually beneficial and balanced international trade. In this situation, there would be no violence to any nations valid claims, excluding transitional problems. Low-income nations would be helped by developing countries such as the United States, and the living standards in the high-income nations will still be safeguarded.
No country, not even the United States, can be completely self sufficient, nor should it try to be. At one point in time, there will be a need in the US for a resource not available. The US should, however, not be so dependent on other countries. The US should learn to maximize its production by making it more efficient. The protectionist solution is more complex than how it is presented, though. The issue of free trade vs. protectionism is hard to solve, since there are so many factors to it. Simply stated, the whole issue is a game of theory.
The terminology of a Prisoners Dilemma is applicable to the competition of global markets. In the Prisoners Dilemma, two prisoners are accused of a crime. Both prisoners are taken into their own questioning rooms. If both prisoners confess, they are given a light sentence. If one confesses and the other does not, the one who confesses is set free and the other receives a heavy sentence. If both prisoners do not confess, the sentence is at its heaviest. This situation parallels the risky business of global marketing. The respective nations act as the prisoners, always having to guess the actions of the other nations.
Risks are always involved, but by weighing the costs and benefits of the actions, a dominant or maximum strategy can be made. The dominant strategy is the strategy that yields the best results regardless of the opponents strategy. The maximum strategy is the maximization of the minimum results. The propensity for the United States to lean towards free trade lies in the belief of a declining American hegemony. A hegemony is a dominant state that uses its economic power to impose and maintain customs and rules aimed at preserving the existing world order.
Even though the US has declined from its superstar economic status, it still boats a GDP of $6. 26 trillion dollars, which is larger than the GDPs of Japan and Germany combined, $6. 12 trillion. The theory of hegemonic stability suggests that a dominant state is necessary to enforce international cooperation and maintain international law. This theory will be proved or disproved in the upcoming years since global politics is moving to even the scales of countries with such tools as free trade. The US economy is now at a trade deficit, and has been in that state for quite awhile.
The best strategy to alleviate this problem would be protectionist measures. Although there will be those who oppose these measure, in the long run protectionism will be more beneficial to the economy of all American industries. Political liberty, the basic freedoms essential to the formation and expression of the popular will and its translation into policy, is not infringed by protectionist measures. The American population has historically disagreed on how much government involvement is enough. But a lassiez-faire attitude is not the solution to the problems the United States faces.
A protectionist government is not a restrictive one, but rather a government that protects the interests of its people as a whole. If there comes a time when protectionist measures are not beneficial to the American people, then public policy can be changed by the majoritys will. The US must ask itself if free trade policies are in its best interests, or if they are just a popular growing trend in a new age of political correctness. It is true that the global market has already expanded, but it is never too late for the United States to begin shutting its doors to the free market.