Pros and Cons of Protectionism, Free Trade - The Basics of Economic Theory

Pros and Cons of Protectionism

A comprehensive and balanced evaluation of the protectionism policy obliges analysts to determine both positive and negative sides (Figure 8.7). Pros of protectionism are as follows. First, restraining imports helps balance the passive (import & export) trade balance. Secondly, protectionism allows to protect national production from destructive for it dumping, and also from "unfair" exporters of goods from countries with cheap labor. Thirdly, the protectionism policy provides protection to young branches of the national economy that are still not "on their feet", are not competitive in the world market and therefore need special state support. Fourthly, trade barriers on the way of foreign goods stimulate their own production in the country. And this means that the diversification of national production is developing and the economy is growing, employment is increasing and the country's dependence on "surprises" is decreasing. world market.

Cons of protectionism, coincidentally, you can also combine in four points. The first is that excessive protectionism weakens competition in the economy and stimulates its improvement. As a result, the NTP is inhibited, the quality of products is deteriorating, costs are increasing and, as a consequence, the production efficiency falls. The second disadvantage concerns consumers, because trade barriers beat by their pocket and the possibilities of choice: shops are being depleted, prices are rising for imported and conjugated locally produced goods . Immediately, the third negative will appear: the strengthening of the economic isolation of the country deprives it of the corresponding advantages of MRI, the benefits of specialization of production and international trade.

Pros and Cons of Protectionism

Fig. 8.7. Pros and Cons of Protectionism

Finally, the fourth minus of protectionism is the undermining of opportunities for exports of goods from the country. After all, international trade is a "two-way street". Restrictions on imports are also constrained by future exports, as the foreign trading partner is deprived of additional foreign exchange earnings for subsequent export calculations. In addition, each state seeks a balanced trade with other countries and the protectionism of the latter often responds by the same measures.

Free Trade

The second and the opposite type of the foreign trade policy of the state is free trade, or, as it is also called, free trade (free trade, free trade ). It assumes free movement of goods and services between countries without known trade barriers. Advantages of free trade flow from the fact that the above-mentioned disadvantages of protectionism are eliminated (Figure 8.8).

The advantages of free trade

Fig. 8.8. The advantages of free trade

So, free trade promotes competition and thus limits the monopoly of national firms. As a result, manufacturers are forced to innovate, improve the quality of products, reduce its cost, increasing production efficiency and lowering prices. Freedom of trade, further, expands the supply of goods, providing a greater choice for consumers. In addition, the unhindered development of the international division of labor ensures the effective (market) allocation of resources in the world economy. Thanks to this, economic growth and material well-being of people become higher. Finally, the freedom of trade contributes to greater openness of societies, and hence to the rapprochement and cooperation of peoples and countries.

In turn, flaws may result from the lack of protection of the national economy from possible negative impacts from foreign business (dumping, flooding of the domestic market with foreign goods, imposing alien to the population a given country of consumer tastes, the sale of low-quality or obsolete products, etc.).

Most modern states conduct a flexible foreign trade policy that combines elements of both protectionism and free trade. However, the general course here is liberalization of world trade. This means that countries are increasingly trading mutually and mutually advantageously with each other, gradually freeing trade barriers and establishing a natural for civilized of humanity most-favored-nation treatment in mutual trade (or, as it is customary to say, "normal trade relations").

At the same time, for the regulation and development of trade relations between countries, special bilateral and multilateral treaties, agreements, customs and other unions are concluded, and international organizations are created. For example, within the framework of the United Nations, the problems of world trade and economic development of young states are resolved in such a body as UNCTAD (from UNCTAD , or United Nations Conference on Trade and Development) - The United Nations Conference on Trade and Development (established in 1964 and on 1 April 2000, had 188 members).

However, closer to business practice is another structure - World Trade Organization (WTO), the former General Agreement on Tariffs and Trade, GATT (from English, abbreviation GATT - General Agreement on Tariffs and Trade, concluded in 1947 by 23 states. In 2001, the WTO was already united by more than 140 countries (including a number of former Soviet republics - Georgia, Kyrgyzstan, Latvia, Moldova, Estonia). Russia has long been preparing to join it (if it has not already entered the time you read these lines).

WTO members jointly solve urgent problems and disputed issues, agree on further steps in liberalization and development of their economic cooperation, participating in regular rounds of permanent negotiations and conferences. However, being in the ranks of the Organization is not so simple. A WTO participant must meet international standards and comply with certain rules and regulations in international economic relations. It should be ready to open wider the door to the world economy and not be afraid of foreign competitors, even in vulnerable business areas (for example, in banking, insurance). A WTO member must at last master the art of civilized cooperation.

The people of the modern world are increasingly cooperating and doomed to cooperation. But to cooperate means to be able to give in, take into account the interests of others, act not from the position of strength or arrogance of the "great power", but from the position of complete equality and to ensure benefits for all of the cooperating parties.

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