Wednesday, March 7, 2012

Free Trade versus Protectionism in Achieving Economic Development‏

One of the greatest international economic debates of all time has been the issue of free trade versus protectionism. Before we discuss this issue, we must first define the two. Free trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports). According to the law of comparative advantage the policy permits trading partners mutual gains from trade of goods and services. Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. On the other hand, Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow (according to proponents) "fair competition" between imports and goods and services produced domestically.

Proponents of free trade argue that it promotes economic growth, freedom, employment, peace, and prosperity. At the same time, for them protectionism promotes famine, subsidies, tariffs, unemployment, and war. For them, it encourages countries to trade freely with one another thereby promoting economic growth and higher employment. One of the best evidence of the success of free trade is Singapore. Singapore is just a tiny island on the tip of the Malaysian Peninsula which cannot even supply its own freshwater and yet it is one of the richest countries in the world. Its success can be attributed not only on its enterprising people, good harbor , and strategic location but also on free trade. Singapore needs to import almost everything from food and raw materials to domestic helpers from Philippines and Indonesia and so it needs free trade in order to survive. Without free trade, Singapore will not even exist. Proponents of free trade argue that it also encourages peace because logically one country will not attack the other if it benefits economically from that country. For example, China will not attack the US or vice-versa even though they are vying for influence in Asia especially the issue of the South China Sea because the US is still one of China's biggest customer of its exported goods and the presence of US investors on its soil creates jobs for many Chinese people. Also the US needs China for cheap goods and services in order to remain competitive. Apple products and American cars will not be that affordable without cheap Chinese labor not to mention the rising numbers of middle-class Chinese people who have a high demand for American products thereby making them one of the biggest customers of American companies. In short, free trade promotes prosperity.

On the other hand, proponents of protectionism argue that it protects the goods and services produced by their own country from that of other countries. While the contents of the above mentioned paragraph are true, we must not forget that thousands of Americans lost their jobs because of cheaper Chinese or foreign labor. Thousands of factories shut down because of outsourcing. Another situation is the production and innovation of rare earth elements which are used in the production of high-technology gadgets and hybrid vehicles was once dominated by the US until the 1980s when China began embracing capitalism and now China produces 97 percent of the world’s rare earth elements. As a result, mines were closed and hundreds of Americans lost their jobs not to mention the disappearance of American expertise in rare earth production. In the Philippines, the shoe industry is suffering a major setback because of the inflow of cheaper Chinese shoes in the domestic market. Filipino hand-made shoes just cannot compete with the machine-made Chinese shoes not to mention the large difference in price. For them, industries like these must be protected in order to save jobs and the economy. For them, free trade is just an ideal situation while protectionism is the order of the day in international trade.

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