Trade vs. Protectionism

Arjan Chhatwal Poli 305/4 ID: 6178332 International Political Economy Prof. E. Bloodgood Trade vs. Protectionism Trade between countries has been going on for centuries. Movement of goods and services began as a mean for nations to obtain what they couldn’t produce themselves.With the introduction of Ricardo’s â€Å"comparative advantage† – which illustrated how all countries that participate in trade benefit from it-, trade began to focus on what a country is better at producing a product or a service and which country can produce it at a lower cost. Nowadays, developed countries and international organization promote free trade, open borders, and liberalization of the market intensively. However, many of those core countries also practice protectionism in order to shield their industry from foreign competition.This poses a great problem to developing countries which are forced by core countries to practice free trade but would actually benefit from prote ctionist measures. In order to represent this situation, I will analyze the economic situation of two countries with very different economies: Pakistan, representing the developing countries and the United States, which represent the developed countries. I will compare their economic situation and policies under the Bush administration and Musharaf’s government.In this essay, I will demonstrate that our international economic system is very hypocritical in the sense that the countries that would benefit from and help other countries by practicing free trade are practicing protectionism, and those who would benefit from protectionism are forced to implement free trade policies. First, I will observe and describe those two main economic policies: protectionism and free trade.Then I will concentrate on the economic situation in Pakistan and the United States in order to illustrate what use countries are making of free trade and protectionism and, on the other hand, what face the y are showing to the world. Free Trade: A Market Model of Deregulation Free trade is a market model which promotes trade liberalization by the reduction of trade barriers. This model was promoted by the economist David Ricardo in the late 18th century and beginning of the 19th century. He coined the â€Å"comparative advantage† theory. Comparative advantage† is a theory that promotes free trade by demonstrating how trade between countries benefits all parties because of the different opportunity costs. Every country can produce a good at a cheaper price than another country and has to focus on producing and exporting that particular good. If all countries do so and specialize in the production of the good that is cheaper to produce in their country, they can trade those products with each other at lower costs than if they produced all of the goods themselves.Practicing free trade means the abandonment of government restrictions in the flow of goods, workers and services across borders. Those restrictions include taxes, quotas, tariffs, and subsidies. This economic model is based on deregulation and on the elimination of binding rules on corporations. Free trade also prohibits government to give financial advantages to businesses through tax cuts in order to make them more competitive against foreign industries. This results in the elimination of monopolies and oligopolies in countries by allowing full competition.However, negative outcomes of economic deregulation includes less respect and commitment to health, labor, and environmental laws and can help multinationals outcompete smaller local industries. Another important aspect of the free trading model is the principle of Most Favored Nation which basically requires all members of trading agreements to treat other members equally. Nowadays, the biggest promoter of Free Trade is the World Trade Organization, which claims that removing trade barriers would lead to the end of poverty around the wor ld.The WTO argues that in opposition to free trade, protectionism doesn’t help promoting economic expansion. Free trade policies, it is argued by the WTO and major developed countries, promote growth. The free trade model is used by the WTO to rescue developing countries and help them develop economically more efficiently. This means that in order to receive money from the WTO, developing countries are required to follow â€Å"adjustment policies†, also know as â€Å"structural adjustments†. Those policies all push towards economic liberalization.They include cutting back on social spending, devaluation of the currency, trade liberalization, removing price control and subsidies and privatization, better governance and elimination of corruption. The WTO argues that the benefits that the countries will get from free trade outweigh those costs, which include poverty and environmental costs just to name a few. The WTO actually admits that in the short-term, free tra de will lead to inequalities but in the end, the wealth accumulated by the big businesses will trickle down and most people will benefit from the free trade model.However, as J. W. Smith argues: â€Å"That current free trade is just as unequal as the mercantilist trade it replaced is easily demonstrated. The structural adjustments imposed upon weak nations as necessary for free trade are the opposite policies under which every successful nation developed. That they developed under the philosophies of Adam Smith is a myth designed to hide a continuation of plunder through unequal trades. †[1] The paradox here is that, more and more, the developed countries who promote free trade actually practice protectionism.The problem is that free trade can only lead to fair trade if every country practices it, especially core countries that have the means to practice free trade. Nowadays, however, developed countries promote free trade and force developing countries to practice it but the y themselves hypocritically practice protectionism. This penalizes poor countries who are not ready for the global market yet. It is also often noted that even if poor countries practice free trade, it won’t necessary lead to major successes.It obviously results in higher income but social inequalities remain in most cases. This can be called â€Å"Growth without social development†, and free trade is obviously not solving this tendency. Protectionism: A Regulatory Economic Policy Protectionism is an economic policy which restricts trade between countries by imposing economic barriers and policies. We usually tend to believe that protectionism is only a question of tariffs. However, government do have ccess to many other tools to protect their industries, including quotas, government regulations such as anti-dumping laws to protect domestic industries from competition of foreign enterprises, trade restrictions and exchange rate manipulation. Those policies make the pro duction of goods cheaper for the industry that is granted the money or the preferential treatment. Domestic industries can therefore sell their product outside of the country for cheaper. In that perspective, pprotectionism is an isolationist doctrine which, some argue, leads to unfair competition.The main goal of protectionism is to handicap foreign industry. This economic model is associated with neo-mercantilism, which main objective is to maintain a positive trade balance. Protectionism is often practiced by countries that seem to be free-traders, such as the United States and the UK, in order to protect their favorite or influential industries. â€Å"Rich countries’ protectionism† includes subsidies to local industries such as agriculture and textiles.Core countries have the funds to practice that kind of protectionism while developing countries that would actually benefit from protectionism are asked to deregulate their economy. â€Å"UNCTAD estimated that rolli ng back [rich country] protectionism in this area could create additional export earnings of up to $700 billion for developing countries, to be realizable over a 10-year period. This is less than 5 per cent of the combined GDP of industrial countries, but could absorb an important part of unemployed labour in the South and generate a vent for surplus†[2].It is often argued that developed countries are taking away from developing countries what helped them develop their own economy: protectionism policies. Protectionism is necessary to economic development in the sense that it helps build a strong foundation for a strong economy. Protectionism is essential for any developing countries to help their infant industries develop; become mature and competitive for the international market.It is hard for countries to enter market if they are forced to practice free trade; they may need help of protectionism policies in order to protect their infant new industries. The United Statesâ⠂¬â„¢ economy is a perfect example of what â€Å"rich countries’ protectionism† is. By examining its situation, it is easy to understand how developed countries show the face of a free trading nation but practice protectionism interiorly. The United States: The Face of a Free Trading Nation?The United States have always been a model of a Free Trade economy and have always promoted economic liberalization all around the world. When we observe the country’s practices and economic policies from the outside, it is clear that the USA is a firm believer in free trade. Indeed, the country is involved in many free trade agreements all around the world. Those include Free Trade agreements with Australia (2004), CAFTA-DR (2005), with numerous Latin American countries such as Chile (2004) and Columbia (2006), without forgetting NAFTA (1994).United States take great pride in its participation in international trade and promoting free trade between countries. Presently, inte rnational trade is primordial to the economy of the country and accounts for around a quarter of the USA’s GDP as it was mentioned by the Conference on a New Architecture for the U. S. National Accounts in 2004. Governmental economists all agree that Free trade agreements are necessary in order to promote rapid economic growth by increasing competition, cooperation between countries, and specialization.The United States follows Germany as the second most economically open country in the world. Inside a Free Trading Nation: A Hidden Protectionist Economy The United States takes good pride in proclaiming themselves as a non-discriminatory economy and a promoter of open global markets. While USA gives the image to the world of being a pure liberal economy, the country practices protectionism regularly, which shocks many trading partners and developing countries. This can be called the problem of the â€Å"Double Standard†.Rich countries promote the free trade ideology but in practice, they protect their own industry. This situation of double standard and of the USA promoting free trade but practicing protectionism was explained by the eleventh president of the World Bank, Robert Zoellick: â€Å"In order to promote free trade, the US has to manage the home front and the international front. And on the home front the only way that we can continue to get support from the American people for open markets and trade is to use our domestic and international laws to the fullest. †[3]For a society that calls itself a free-trading one, it is quite ironical and even hypocrite that, in 2002, Bush announced the imposition of new tariffs on several influential industries such as the steel industry and the agricultural sector. While developing countries, in order to please foreign investors and international economic agencies, keep on lowering their trade barriers, the USA has, over the last two years, increased its subsidies to farmers, raised tariffs on s teel imports, and still hasn’t agreed to sign the WTO agreement to the patent rights of its pharmaceutical companies.Since the election of George W. Bush, the economy of the United States has proven to be quite protectionist: â€Å"The steel tariff and the farm bill attracted the most attention, but they are part of a broader picture that includes the punitive (and almost completely unjustified) tariff on Canadian softwood lumber and the revocation of Caribbean trade privileges. When it comes to free trade, the Bush administration is all for it — unless there is some political cost, however small, to honoring its alleged principles†[4]Let us examine more in details the three most important policies of the last decade that can help us understand how the United States is giving an image of a free-trade economy but is actually practicing protectionism. The first and very striking example of this protectionism is the Bush administration deciding to protect its steel industry which has been facing very important economic problems because of the European Union competition. The second example would be the case of the automobile industry. The Japanese automobile industry has always been a strong competitor for the USA industry.This is why the United States imposed, from â€Å"In May 1981, with the American auto industry mired in recession, Japanese car makers agreed to limit exports of passenger cars to the United States. This â€Å"voluntary export restraint† (VER) program, initially supported by the Reagan administration, allowed only 1. 68 million Japanese cars into the U. S. each year. The cap was raised to 1. 85 million cars in 1984, and to 2. 30 million in 1985, before the program was terminated in 1994. †[5] The Farm Bill of 2002 also reflects very well the protectionist tendencies of the country.This Bill distributed more than $190 billion to USA farmers and agriculture businesses around the country, and this over the next 10 years. This Bill was passed in order to help the agricultural sector overcome the difficulties it faced due to international competition. Those subsidies will make it harder for foreign producers to compete against the agricultural industry: â€Å"Third World producers will find it harder to sell to the US market and, since the USA exports 25 per cent of its farm production, they will find it harder to sell in other international markets or to resist competition from US products in their home markets.The disposal of increased US surpluses as ‘food aid' is likely to compound the loss of livelihoods. †[6] While rich countries such as the United States can afford to practice protectionism, developing nations are forced to open their economy to free trade. Pakistan, the second country we will analyze in this essay is the perfect example of a country that would benefit from protectionism policies but is forced to liberalize their economy in order to receive funds from the W TO.The United States and Pakistan have been interacting on the international scene since the late 1950s, soon after Pakistan’s independence. This relationship has been successful but has also suffered from intermittent political conflicts, which reflects pretty well the complexity of the geopolitics of South East Asian region. After the events of September 11, Pakistan and the United States became even closer than before because the Bush administration relied on the help of Musharraf’s military dictatorship to eliminate terrorism in the region, mainly in Afghanistan which has a common border with Pakistan.The main difference between the United States during its early stage of development (1880s) and Pakistan’s development phase (late 1990s, 21st century) is that the United States weren’t dominated and repressed economically by major powers and international trade organization such as the IMF and the WTO, imposing economic liberalization and tariff limits on them. The United States weren’t subject to neo-colonialism like Pakistan is today. Protectionism in Pakistan: A Focus on the Textile Industry South Asia has long been seen as one of the most protectionist region in the world.As the World Bank states in the calculations of the GDP growth rates in the World Development Indicators, trade within the region accounts for less than 2% of the GDP which is minimal compared to 20% in East Asia. The region lacks diversity within the market and the products that are traded. In addition, most countries of the region, including Pakistan, still used up until recently import-substitution policies which limited trade possibilities within the region and outside the region. Trade was also hampered by political tensions, especially between India and Pakistan.Protectionism is Pakistan is mostly directed towards one of the most important industry in the country: the textile industry which accounts for more than 60% of the country’s expor ts. Pakistan under Musharraf saw the introduction of few protectionist policies concentrated towards this influential industry. In the policy speech of 2005-2006, the Minister of Commerce announced that all textile exporters that would â€Å"register their products with Pakistani Trade marks in foreign countries for export purposes will be provided subsidy equal to 50% of official fees of such registrations. [7]. Support to this important industry was instituted to help local businesses improve the quality of their product and compete against foreign industries in order to increase the Pakistanis textile industry’s market share. This protectionist policy was put in practice to reassure the industry, which was afraid after the quota restrictions were removed in 2005. It was also introduced to protect the industry from potential job losses and the loss of potential export if the textile industry wouldn’t reinvent itself.The 2005-2006 trade policy speech focused on allev iating costs for Pakistanis businesses in order to make the local industries more competitive on the international scene. Protectionism can also be practiced in the form of tax exemption for local industries. Musharaf’s government in the Federal Budget of 2005-2006 granted tax cuts to prominent industries in the country, including textile industry, sports goods, carpet industry, leather, and surgical instruments. In addition, the imports of necessary materials for these industries are also exempted from duties.Pakistan’s Economy: A Forced Free Trading nation Trade liberalization in Pakistan began in the late 1980s and developed even more during the 1990s under Musharraf’s military government. Today, Pakistan is part of various trade agreements, all leading to economic liberalization. Those include the Pakistan-Malaysia Free Trade Agreement, Pakistan-China Free Trade Agreement, Pakistan-Sri Lanka Free Trade Agreement, Pakistan-Malaysia Early Harvest Program, Paki stan-China Early Harvest Program and Pakistan-Iran agreement.When I briefly presented free trade, I mentioned the â€Å"growth without development† problem that developing countries face nowadays. This is a tendency to grow economically but without promoting social development. It is the result of free trade and is perfectly well illustrated by Pakistan’s situation. The more recent budget of Pakistan is mirrors this tendency, by showing commitment to neo-liberal policies, IMF led-policies. The budget focuses on pleasing the developed countries and on macro-economics rather than on developing the country itself. The budget focuses on the military which accounts for 20% and repaying the debt, 31%.Trade liberalization has been, since Musharraf’s entry in power, another priority within the budget. As the World Bank argues, liberalizing the Pakistanis economy would lead to an increase of 8$ billion if trade barriers were lifted. â€Å"Annual trade between India and Pakistan, the bulk of which is routed through Dubai, is currently estimated at US$1 billion, but could be as great as US$9 billion if barriers are lifted. †[8] In 1999, the Asian Development Bank granted a 300$ million loan to support the Government's Trade, Export Promotion and Industry (TEPI) Program.This program was approved by the ADB, the World Bank and the IMF because it was based on liberalization of trade in Pakistan. TEPI is based on the elimination of nontariff barriers and on the increased access for exporters to the Pakistani market. This program was basically created to end import substitution policies and promote exports by giving as many advantages to local industries as to foreign companies. This program focuses on the privatization of industries and meets all criteria stated by the World Bank concerning quotas, subsidies, and customs.This facilitates foreign investors and promotes economic growth, proven by the fact that â€Å"After more than three decades of near stagnation in per-capita incomes during 1950–80, South Asia showed signs of growth beginning in the 1980s that accelerated in the 1990s and beyond. †[9] Pakistan’s economy used to be based on import substitution and was very little diversified. Taking into consideration those obstacles to trade, the Pakistani ministry of Commerce instituted a program based on diversification of exports and market opening for an increased access to facilitate trade.Pakistani economy has continuously followed WTO required adjustment of liberalization in order to remove trade barriers and obstacles to import. Following the WTO rhetoric, the government argues in favor of opening the market because in order to increase its exports, the country has to encourage imports as well as stated in the trade policy speech of 2005-2006: â€Å"It must be realized that no country has been able to enhance its exports significantly without liberalizing its import regime. †[10] Following this path, exports did increase consistently as well as imports which reached $20. 23 billion at the end of last year according to that same Trade Policy Speech. The irony that we face after having analyzed the economic situation of both countries is that the now-developed countries benefited during their development from an active state that helped them build their industries and protect. As the 1995 OECD Report showed, developed countries achieved growth starting in the 1950s under very protectionist states. â€Å"The unprecedented growth in per capita income in several developed countries during the period 1950-1973, was also achieved under activist states.When they followed the ‘bad' policies of establishing full welfare states with stricter financial market regulations, corporatist wage bargaining institutions, investment co-ordination and in some cases nationalized industries, even the now developed countries saw an exponential increase in their own growth. †[11] However, countries that wish to develop nowadays are required not only to practice free trade but not to use protectionism policies. This is unfair in the sense that they have to develop in an environment that doesn’t promote or help their growth.Developing countries would benefit and even need higher tariffs and trade barriers in order to protect their industry from the more and more competitive and aggressive trading environment. This current tendency is referred to as â€Å"kicking away the ladder†. Core countries act the way they do to ensure their domination over developing nations and keep the poor countries in a vicious circle, as they remain dependant on export of primary and raw materials, not being able to move up the trade ladder. This harms developing countries that struggle in this free trade world economy.In addition, imposing free trade on developing nations actually illustrates the focus of the WTO on short-term benefits and forgetting about the import ance of long-term goals such as deepening the industrialization of the periphery countries. The imposed policies of the WTO prevent the developing countries of using protectionist policies to help their industries develop. Several experiences have already proven that the pressures to liberalize countries’ economy can do more harm than good to new economies.Nonetheless, the WTO continues to force developing countries to open their market and reduce their trade barriers. Liberalization and free trade, although they have great outcomes for developed countries, also lead to greater inequality between the core and the periphery. â€Å"According to one estimate, the Uruguay Round’s combined liberalization increased global economic welfare by $75 billion, of which almost $70 billion went to developed countries, $5 billion to Newly Industrialized Economies (NIEs; Korea, Singapore and Taiwan), and none to developing countries taken together. [12]. Even with such numbers, devel oping countries are still forced to join the free trade movement and the WTO and developed countries continue to promote the benefits of free trading. Today, while the IMF and the WTO force developing countries around the world to practice free trade by reducing trade barriers, Pakistan included, the USA keeps on to implementing protectionist policies in order to save industries in danger or suffering from temporary discomfort.This leads to a greater gap between the productivity of developed and developing countries. The factor that is important to note here is that today’s developed countries once protected their industries behind protectionist policies, but are now promoting free trade in countries that are trying, just like they did, to succeed economically. The developed countries of today reached their economic prosperity through protectionism economic policies, and then started practicing free trade.This irony now rules international trade. It is clear that there is a p roblem concerning trade between countries in the sense that there is an inequality in the terms of trade imposed on developed countries and developing countries. Free trade can only lead to prosperity if all countries benefit from equal treatment. Even then however free trade can lead to economic prosperity but won’t necessarily lead to social development, which is what developing countries need the most.