International Microeonomics Free Trail versus Protection

Trade makes it feasible for people to specialize in jobs for which they have special talents. Specialization increases productivity. Therefore trade can play a role in raising real production and income. 

Because countries differ from one another in resources and special talents, trade between countries can be shown, under competitive conditions, to benefit both the exporting country and the importing country.

Nevertheless, particular groups lose from trade. Consumers of exportable goods lose from export trade under competitive conditions. Producers of importable or import-competing goods lose from import trade under the same conditions. Producers and/or consumers of nontraded goods may also lose from trade if the particular nontraded goods they produce or consume are complementary to or competitive with imports or exports in consumption or in production.

A country is said to have a comparative advantage in the production of one good and a comparative disadvantage in the production of another good if its pretrade or restricted-trade relative price of the first good is lower, and its relative price of the second good is higher, than those of its actual or potential trading partners or in the rest of the world.

Comparative advantages and disadvantages, when they exist, may be due to a number of different causes. The classical (Ricardian) theory stresses differences in productivity for different goods and services. The later Heckscher-Ohlin theory puts the most stress on differences in "factor endowments, " meaning supplies of the several productive inputs.

Comparative advantage is not a static concept, but varies over time. The so-called product cycle is a case in point, as applied to advanced industrial products.

Fears that free trade and an accelerated product cycle could wipe out the industrial sector of an economy ("hollow out " the economy) may be unfounded because new industries typically develop to replace those lost to foreign producers. 

Free trade also tends to equalize input resource prices between trading countries in the same manner as migration.

We cannot define protection rigorously However, it includes a wide variety of aids to a country's import-competing goods and to its exports. It extends well beyond the traditional import tariffs and quotas to a wide range of bounties, tax preferences, and types of administrative protection. Administrative protection subjects competitive imports to burdensome, idiosyncratic, costly and time - consuming specifications or inspection procedures.

The effective rate of protection is usually different from the nominal rate. The effective rate takes account of the protection given to the raw materials and components that go into a product in addition to the nominal rate on the product itself. Protection given to raw materials lessens the effect on that given to final products. 

To counteract administrative protection and mercantilistic public attitudes abroad, the Office of the V.S. Trade Representative (VSTR) has adopted a strategy of market opening in countries with large positive trade balances with the U.S. According to this strategy, such countries must either guarantee U. S. exporters a reasonable share of their markets or face discriminatory penalties against their own exports to the V.S.

Among economic arguments for protection, the most effective have been the infant industry (learning-by-doing) and the high-wage-rate (cheap Foreign labor) arguments. Others have been: the terms of trade argument; avoidance of risks by developing the home market; the attraction of foreign capital, and sometimes also of skilled labor, to "tariff factories "; the response or bargaining reaction to foreign protection; and the solution of problems connected with the country's employment level, payments balance, or government budget.

Among the political (and social) arguments for protection are: the national defense argument; the critical minimum of basic goods argument; resistance to possible predatory activities by foreign interests; and, most important, the political influence of "intense minorities, " otherwise known as " special interests." 

Commercial treaties regulate trade and commerce among nations. Multinational treaties can be used to form free trade areas and customs unions, which are important means of economic integration. They differ mainly in that the members of a free trade area retain their separate tariffs against nonmember countries, while a customs union has a common tariff structure. 

The European Community is the most important move toward economic integration today. It is a customs union. There is also a European Free Trade Association.

Free trade areas and customs unions both create and divert trade. The trade-creation effects are welcomed by internationalists as moves toward greater freedom of trade; the trade- diversion effects work in the opposite direction.

After World War 11, a proposed International Trade Organization (ITO), affiliated with the United Nations, never came into being because of United States opposition. The various First World countries, however, are seeking to reduce the general level of tariff and nontariff protection among themselves, using for this purpose a General Agreement on Tariffs and Trade (GATT). 

After a long period of positive balances, the U. S. balance of trade has been increasingly negative since about 1970. America's reduced international competitiveness is attributed to an inability or unwillingness to adjust to increased productivity in the rest of the world. Factor endowments in foreign countries have improved, and the product cycle has accelerated.