Trade vs. Protectionism
Trade between countries has been going on for centuries. Movement of goods and services began as a mean for nations to obtain what they couldn’t produce themselves. With the introduction of Ricardo’s “comparative advantage” – which illustrated how all countries that participate in trade benefit from it-, trade began to focus on what a country is better at producing a product or a service and which country can produce it at a lower cost. Nowadays, developed countries and international organization promote free trade, open borders, and liberalization of the market intensively. However, many of those core countries also practice protectionism in order to shield their industry from foreign competition. This poses a great problem to developing countries which are forced by core countries to practice free trade but would actually benefit from protectionist measures.
In order to represent this situation, I will analyze the economic situation of two countries with very different economies: Pakistan, representing the developing countries and the United States, which represent the developed countries. I will compare their economic situation and policies under the Bush administration and Musharaf’s government. In this essay, I will demonstrate that our international economic system is very hypocritical in the sense that the countries that would benefit from and help other countries by practicing free trade are practicing protectionism, and those who would benefit from protectionism are forced to implement free trade policies.
First, I will observe and describe those two main economic policies: protectionism and free trade. Then I will concentrate on the economic situation in Pakistan and the United States in order to illustrate what use countries are making of free trade and protectionism and, on the other hand, what face they are showing to the world.
Free Trade: A Market Model of Deregulation
Free trade is a market model which promotes trade liberalization by the reduction of trade barriers. This model was promoted by the economist David Ricardo in the late 18th century and beginning of the 19th century. He coined the “comparative advantage” theory. “Comparative advantage” is a theory that promotes free trade by demonstrating how trade between countries benefits all parties because of the different opportunity costs. Every country can produce a good at a cheaper price than another country and has to focus on producing and exporting that particular good. If all countries do so and specialize in the production of the good that is cheaper to produce in their country, they can trade those products with each other at lower costs than if they produced all of the goods themselves.
Practicing free trade means the abandonment of government restrictions in the flow of goods, workers and services across borders. Those restrictions include taxes, quotas, tariffs, and subsidies. This economic model is based on deregulation and on the elimination of binding rules on corporations. Free trade also prohibits government to give financial advantages to businesses through tax cuts in order to make them more competitive against foreign industries. This results in the elimination of monopolies and oligopolies in countries by allowing full competition. However, negative outcomes of economic deregulation includes less respect and commitment to health, labor, and environmental laws and can help multinationals outcompete smaller local industries. Another important aspect of the free trading model is the principle of Most Favored Nation which basically requires all members of trading agreements to treat other members equally.
Nowadays, the biggest promoter of Free Trade is the World Trade Organization, which...