FREE ESSAY ON INTERNATIONAL TRADE

INTERNATIONAL TRADE

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 Smith's 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 Bank's 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 today's 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 d'Estaing 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 France's refusal to accept any
measure of change. The Uruguay Round's 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 America's 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 America's. 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 country's exports of a given product to the US, then the
country's 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. NAFTA's 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 didn't 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 nation's 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 opponent's
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 majority's 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.