The historical debate between Protectionism and Free Trade

doctrines.

The debate between both commercial policies, protectionism and free trade, is almost
old as the commerce itself. Let’s start by defining the concepts. With simple words free
trade can be defined as a commercial policy in which foreign goods cad be acquired by
native consumers as ease as domestic goods. That means not to have additional barriers
to foreign trade. In the opposite, we have protectionism which seeks to favor domestic
productions against the foreign products. This doctrine uses additional taxes (tariffs),
limits or extensive paper work in order to affect the terms of trade in foreign trade.
However, the most common way to do it is by applying additional taxes to imports, as a
result, costs of exportation increases for the foreign producer which often means a
higher price to the market.
Both policies have some benefits and disadvantages for the economy and the population
of each countries. Free trade favors consumers by giving them better quality products,
encouraging innovation and giving great prices due to competition between companies.
Also, it is able to promote other bilateral relationships between countries because
economies start to be interdependent, and hopefully, will decrease international wars.
The free competition allows prices to go down and the cost of living also get down. That
means poor people will be able to acquire some goods and services, that maybe in the
domestic market they will not be able to buy. Also, wealthy people will have the
opportunity to save money on basic products which mean they will be able to use the
remaining money in other products or investing in the domestic industries, in that way
the whole economy gets benefited by the free trade. In this same case, countries are
able to have benefits of their comparative advantages (model exposed by Ricardo-
Torrens). According to Avalos (2014), this scenario occurs when two countries with a
limited quantity of resources will be able to take benefits from the commerce if they
had differences between their opportunity costs. The best example in the world for a
free trade economy is the special administration of Hong Kong. A region with really low
taxes and few commercial barriers, for example, in this region agriculture is almost
inexistent, so they totally depend from the international commerce to feed themselves.
According to World Bank Data, Hong Kong imports around the 80% of their food and
almost all the raw material and energy for their industries. Due to this lack of natural
resources, the most important sector is the services one, with activities such as
commerce and financial services. This sector by itself has the 92,2% participation of the
whole Hong Kong economy. Although, Hong Kong, is highly dependent from external
trade, this region is the second most important financial place in Asia.
Another great example of a free trade economy is the European Union. This economic
region has a free factor mobility between countries. That means any country inside the
European Union is able to trade any product, service or capital (even work) with no
restrictions or additional cost. However, this free trade policy only applies to internal
countries to external ones they have a taxes and regulations.
In the other hand, we have protectionist economies, the regulation of the commerce is
important in two ways: for the economic independency and stability of the region and
for the protection of the population. When an economy opens their market to the world,
some producers will have technical disadvantages against foreign markets industries
according to David Ricardo’s comparative advantages. Which actually means those
domestic producers will not be able to compete with the foreign products and they will
go bankruptcy, and their families and their providers will have economic issues. In the
same way unemployment will raise and the domestic economy will suffer. Most of the
times transition to free trade policy is full of suffering and politic instability.
In the past several economies have protectionist policies such is the case of China, India,
Russia and Latin-American countries. However, when those countries started to open
their markets, their wealth also increased. Countries such as India and China took
advantage of the great labor force they had and started to offer the outsourcing model
to the rest of the world (a low-cost workforce to international industries). Now they
make part of the biggest economies in the world. But with that same outsourcing model
both countries have been experiencing work related abuses like poor payments, labor
harassment and even forced child labor.
Currently, most of the countries have taxes to external economies, but the worldwide
policy is going slowly to the free trade direction, by making free trade agreements. In
this kind of agreements. In theory, two or more countries agree to lower international
taxes (tariffs) gradually, in order to strengthen the commercial exchange between them,
in the negotiation, there are agreed policies for different products, in such a way that
the comparative advantages between both countries are exploited and the best possible
use is made of the exchange
As mentioned before, free trade makes economies to be interdependent and this
situation affects mainly the monetary policy of the countries. For example, in 2016-2017
the exchange rate between the dollar and the Colombian peso went up. That means
Colombian people had to pay more pesos for every dollar they exchange. Since Colombia
and the United States of America (USA) currently have a Free trade agreement the
impact in the Colombian economy was strong. That means all imported products
substantially increased their prices. The consequence of the increase was that basic
products prices also went up, and the inflation rises up to 5,5% by the end of 2016.
Which means that due to the free trade agreement the purchasing power parity of the
Colombian people went down. This was supposed to be compensated by an increase in
exports given the high exchange rate. But this did not happen due to the low
infrastructure and low industrialization that the Colombian economy still has in
comparison with the US economy.
As can be seen, this one is probably the main risk of the free trade doctrine. If one
country has an economic crisis it will affect all the other countries they have commercial
relationships in one or another way. Protectionism prevents this type of situation from
happening. However, this same doctrine has one historic big inconvenience. Even if is
able to protect the wealth to go outside the domestic country, it has no control over the
distribution of the wealth inside the country. In fact, protectionism has helped in a
certain way to increase the inequality in underdeveloped economies. By protecting the
traditional producers, avoiding foreign competition in monopolistic and oligopolistic
markets, the prices of some goods were unnecessarily high. In that way the people with
low incomes was harmed at the expense of the well-being of the wealthiest population.
This is mainly the case in economies such as India and the Latin-American countries.
Other inconvenience experimented by the Free trade doctrine was the Dumping, this is
an action taken by any international big company which is able to produce and sell
products under his total costs during a certain period while local industries go bankrupt
because of low prices. Once the domestic market is out for competition, the
international big company assumes a monopolistic position and rise the prices of their
product. The World Trade Organization (WTO) takes into account this kind of practice
and is allowing countries to have anti-dumping policies, so they will be able to protect
their markets against this kind of unfair competitors.
According to what was discussed during this paper, it is clear free trade is able to
increase the economic wealth of a nation, but it has still a lot of challenges. In that way,
to have a mix of both of the doctrines ir currently the best option for economies. Is
important for consumers to have a lot of options and to have great competition in their
markets. However, it is really important to make the transition with caution avoiding
unnecessary suffering and helping domestic producers to change to a better market, so
the economy doesn’t have to struggle with unemployment and poverty issues during
the process.

Bibliography.

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Intereconomics, ISSN 0020-5346, Verlag Weltarchiv, Hamburg, Vol. 16, Iss. 1, pp.
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 Ávalos, E. (2014). Diferencias tecnológicas y ventajas comparativas en el
comercio internacional. (Own Transcription)
 Taussing, F. (2014). Schmoller on Protection and Free Trade. The Quarterly
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http://www.cedb.gov.hk/about/index.htm?lien_externe_oui=Continuar