Quiz 10: Protectionism Versus Free Trade: Can We Restrict Ourselves Into Prosperity

Business

Economic arguments for trade protectionism focus on two primary topics. One is the market for domestically produced goods, and the other is the deficit in the balance of trade and balance of payments. The following discussion develops those arguments further. When an imported good is introduced to a market at a lower price than the same domestically-produced good, this decreases the demand for the domestically produced good. When that demand decreases, there is less production of that good, and less labor is needed to produce the reduced amount. The result is that fewer workers are needed in that industry, which leads to a problem of unemployment. Furthermore, it may be argued that the reason why the imported good is cheaper is that workers in the source country are paid much lower wages, which is unfair to domestic workers. Thus, international trade agreements cause harm by creating unemployment. The importation of many goods into the domestic market has created a trade imbalance, in which there are a greater value of imports than there are of exports. This means that, each year, a net amount of wealth is leaving the economy, in terms of the balance of trade. When imports exceed exports, the value of the currency decreases in the rest of the world. For this reason, there is an additional need to protect against competition from imported goods in order to reduce the trade imbalance. Therefore, import restrictions should not be eased by trade agreements. Besides the economic arguments, trade protectionism may be argued for several non-economic reasons. One is that there is a need for a country to be self-sufficient to strengthen its national defense. By doing so, it prevents a foreign nation from shutting off the supply of key material if a conflict broke out. Another argument is that the countries where goods can be produced at a low cost (and part of the reason for the low cost) are not subject to environmental restrictions, and that importation of more goods from these countries stimulates further environmental destruction. A third argument is that another reason for the low cost of those goods is that the workers in the source countries are paid very low wages or must work in poor conditions. Importation of more goods from these countries pays into industries whose competitive advantage relies on policies that degrade the quality of life for workers in those countries.

A comparative advantage is a circumstance when the economy of a country can produce more of a certain good (or service) at a lower loss of production in other goods, relative to other countries. Having a comparative advantage enables that country to increase production of a specialized good, and trade it for greater quantities of other goods than it could otherwise produce on its own. In contrast, a comparative disadvantage means that the economy of a country requires a higher opportunity cost, or shift in its resources, to increase production of a particular good. The loss of production of other goods needed to yield a unit of the disadvantaged good represents a higher cost than what would be needed to import it. Consider an example comparative advantage might be used to benefit two trading partners in a classroom setting. Suppose that an assignment for an introductory course in a law school is required, and the instructor has allowed students to work in groups of two, though they must still submit reports individually. The assignment requires a certain amount of case review, and a certain amount of analysis. Suppose that a student groups has two members who are each adept at one of these tasks but less skillful at the other. In other words, each has a comparative advantage: • Student 1 has a comparative advantage in case review. This student needs one hour to prepare a page of review, but two hours to prepare a page of analysis. • Student 2 has a comparative advantage in analysis. This student needs one hour to prepare a page of analysis, but two hours to prepare a page of review. To earn an "A" on the project, each student needs three pages of review and analysis. If two pages of each are submitted, the score will be "B". If any less than two pages of review or analysis are submitted, the score will be "C." A total of six hours are available for each student to work. If each student works independently, in order to get a score of "B", they will have to invest four hours to get the minimum of two pages of whichever task they require more time doing (at two hours per page)-that is, the task that they have a comparative disadvantage in. This leaves them with two hours to complete the other task, which yields two pages. This results in a "B" score for each student. However, if they trade labor, they can each benefit. If Student 1 agrees to work 3 hours to write review for Student 2's report, in exchange for Student 2 working 3 hours to write analysis for Student 1's report, then each would be producing 6 pages of the task which they have a comparative advantage in. Then, by trading 3 pages of one for 3 pages for the other, each can obtain the required number of pages to earn an "A" for the assignment. This is illustrated graphically by the following figure. img In each chart, the red line shows the production possibilities for either student without trading. The region for attaining an "A" is beyond this curve; each student cannot produce more than 2 pages of one type of page without losing another. However, if they trade, the consumption possibilities expands outward so that the "A" condition can be attained.

When two countries trade with one another, each exchanges goods or services that they have a comparative advantage at producing for those which they have a comparative disadvantage. Each country becomes able to specialize its production in its advantaged goods, and by exchanging these for its disadvantaged goods, it can obtain a greater quantity of both than it would have been able to do by producing both the advantaged and disadvantaged goods on its own. Without trading, each country would have had to limit production of the advantaged goods to produce the disadvantaged goods. The social welfare of countries that participate in trade are improved because the potential amount of consumption increases. Each participating country can obtain more of both advantaged and disadvantaged goods by trading and specializing production in its advantaged goods. Increasing the potential consumption means that there is a greater availability of goods for the population of each country. This means that the price of the goods will decrease, meaning that more of that good can be consumed by the population. Furthermore, the increased economic activity that results from the greater quantities of production and consumption would increase the demand for labor in the specialized industry in each country. Reduced prices and increased labor demand mean that each country may potentially increase the amount of resources available to its population, which equates to improved social welfare.