Protectionism vs. Integration: Understanding Global Trade Policies

Posted on May 1, 2024 in Economy

1.5 Protection vs. Integration

Protectionism

The objective of protectionism is to sustain domestic production and raise import prices. Various instruments are employed to achieve this:

  • Tariffs: Taxes levied on imported goods to shield domestic industries. External tariffs act as a ‘tax’ on foreign products entering the domestic market, making them more expensive and less competitive against domestic goods.
  • Import Quotas: Restrictions on the quantity of foreign products that can be imported, irrespective of price. Quotas limit imports and drive up domestic prices, creating barriers for foreign products, especially when international prices decline.
  • Non-Tariff Barriers: Administrative regulations designed to discriminate against foreign products and favor domestic ones.

Arguments Supporting Protectionism

  1. Enables less efficient domestic production to compete with imports.
  2. Boosts domestic production.
  3. Safeguards specific sectors and their workers.
  4. Protects ‘infant industries’ in their early stages of development.
  5. Shields strategic sectors crucial for national interests.
  6. Potential for positive trade creation effects.

Argument Against Protectionism: Trade Diversion

Integration

Economic integration, aligned with free-trade principles, yields various effects:

Static Effects

  • Trade Creation: Replacement of expensive domestic suppliers with cheaper foreign ones.
  • Trade Diversion: Replacement of cheaper suppliers with more expensive ones within the customs union, potentially leading to less efficient sourcing.

Dynamic Effects

  • Enhanced economic efficiency due to increased competition.
  • Economies of scale facilitated by market expansion, promoting specialization, reducing unit costs, and benefiting other companies indirectly.
  • Investment growth, both internal (to adapt to competition) and external (attracted by new opportunities).
  • Stimulus for technological development, fostering competitiveness and R&D collaboration.
  • Improved terms of trade for countries within the union or agreement, depending on their significance in international markets.

1.6 Three Types of Trade Relations

  1. Separate Markets
  2. Free Trade Area: Members eliminate trade barriers among themselves but maintain individual barriers against non-members.
  3. Customs Union: A group of countries forming a single customs territory with eliminated internal trade barriers and a common external trade policy (common external tariff) for non-members.

2. Main Characteristics of International Trade

  • Progressive opening of the international economy since the late 20th century.
  • Concentration of transactions around developed countries and emerging industrialized exporting economies (BRICS), primarily in Asia.
  • Declining influence of Africa, South America, and Central America in international trade.
  • Increasing trade in manufactured goods and services, with a decrease in raw materials trade.
  • Specialization of advanced economies in manufacturing production and trade.
  • Specialization of emerging and developing economies in raw materials trade.
  • South and Central America’s focus on agricultural industry trade.
  • Middle East, CIS (Commonwealth of Independent States), and Africa’s concentration on the mining industry.

3. The World Trade Organization

The World Trade Organization (WTO) governs international trade rules, ensuring smooth, predictable, and free trade flows. It promotes trade liberalization, provides a platform for trade negotiations and dispute settlement, and administers a system of trade rules.

Established in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT), the WTO’s key functions include:

  • Administering WTO trade agreements
  • Facilitating trade negotiations
  • Resolving trade disputes
  • Monitoring national trade policies
  • Providing technical assistance and training for developing countries
  • Collaborating with other international organizations

Trade Negotiations

WTO agreements encompass goods, services, and intellectual property, outlining liberalization principles, permitted exceptions, and commitments to lower trade barriers. These agreements are periodically renegotiated and expanded, with ongoing negotiations under the Doha Development Agenda.

Dispute Settlement

The WTO’s Dispute Settlement Understanding is crucial for enforcing rules and ensuring smooth trade. Countries can raise disputes if they believe their rights are violated, and independent experts issue judgments based on agreement interpretations and commitments.