Free_Trade_Essay

Outline the main advantages and disadvantages of free trade and the major reasons why a country may impose protectionist policies. Over the past few decades, free trade has increasingly been acknowledged resulting in a global market for goods and services. Although free trade is embraced by most economies, protections imposed by governments to institute artificial advantages for domestic producers have become a dominant issue within global trade and commerce. Economically, free trade forms a bridge between many nations, allowing nations to specialize and specify resource allocation upon the basis of comparative advantage. Despite the many benefits of free trade, protectionist policies are still being implemented by governments for reasons that encompass various factors including short-term economic benefits, and political. Free trade, seemingly, provides and avenue between foreign nations and a domestic nation for the trading of goods and services. By removing any protectionist impediments and economy can specialize in its allocation of resources to its most efficient production of goods, thus allowing for the overall decrease in the price of goods. Focusing on production of goods that has the lowest opportunity cost allows for goods that have a higher domestic opportunity cost to be imported. This decreases the overall prices of domestic goods that have a high opportunity cost for domestic producers, thus giving consumers more income to spend. Under a free trade policy, prices of goods are reflected by the true forces of supply and demand, thus this becomes a sole determinant of resource allocation. Alternatively, free trade can, in effect, increase short-term unemployment, as domestic producers which can not compete with foreign producers are forced to cut down production, and effectively employment. Free trade can also restrict the growth of infant industries and companies which cannot compete with large transnational corporations that have an economic advantage over smaller companies. In order for smaller companies, and infant companies, to compete restructuring is crucial to sustain a continual growth of the company. Restructuring is an expensive endeavor, due to the overall reforming of corporate management and operational aspects of the firm. Thus free trade tends to give larger, more established firms an advantage over smaller firms. In addition, free trade can also increase domestic instability within an economy, as a high reliance on global imports can increase income leakages to foreign nations. Moreover, environmental issues tend to arise as a result of free trade, as environmental concerns are not a priority in nations that operate with cheap labor. This raises many ethical issues in relation to goods manufacturing and the trading of goods that are produced unethically. Due to the issues arising with free trade and the need for governments to protect local industries, protectionist policies are implemented by governments to give domestic producers an artificial advantage over foreign competitors. Protectionist policies are primarily used to prevent dumping, an act where foreign firms attempt to sell goods in another country’s market at unrealistically low prices. Dumping, effectively, eliminates domestic producers and can in effect dominate a domestic industry with foreign firms. Essentially, dumping forces local firms to close down business, due to an inability to compete with foreign firms and can also cause a loss in a country’s productive capacity and employment. To prevent dumping, protectionist policies implement tariffs, quotas or subsidies to help and protect local industries from dumping by foreign firms. Furthermore, as discussed free trade limits the growth of infant industries and thus newly formed industries cannot grow under the competitive pressure of foreign firms. To protect his infant industries, government implement tariffs or provide subsides to firms which are newly established. This allows infant industries to “fairly” compete with foreign firms allowing them to grow and prosper in the future. Free trade, seemingly, can be beneficial to an economy, although some aspects of free trade can lead to issues which impede an economy’s growth. Likewise, protectionist policies in the short-run can help develop and expand infant industries and create barriers for foreign firms to perform uncompetitive acts such as dumping. To establish an efficient means of production and trade, an economy should create a balance between free trade and protection, where comparative advantage should be relished but at the same time uncompetitive and inefficient means of free trade policies should be barred from use.