Friday, August 10, 2012

Free trade vs. protectionism - Is there a middle path?

The free trade-protectionist debate has been a longstanding one. I came across some good piece on this debate, though I must confess, I am no expert on this:

1. Free Trade: A Litmus Test of Economics - This piece is rather critical of "mercantilist" protectionism in any form and is a "free trade" supporter all the way. Tariffs,quotas and regulation are signs of State intervention and are per se bad. Free trade is the extension of the free market and should be allowed to work.
"Free-market capitalism transfers wealth to those producers who can serve customers best, as determined by customers. Mercantilists focus on the desires of the domestic producers, not the desires of the customers. They want to protect domestic producers when foreign producers deliver better goods, as determined by customers. They are always ready to use state violence to protect domestic producers. They have been crony capitalists for 350 years."
2Productivity and firm selection: Quantifying the ‘new’ gains from tradeAs protectionist pressures mount worldwide, it is important to continue to shore up the case for open trade policy. This column presents new evidence from Europe on an old gain from trade – the weeding out effect – namely the way increased cross-border competition selects and favours the most productive firms. It argues that this mechanism brings about large gains.
"The reason is a combination of import competition and export market access. On the one hand, as lower trade costs allow foreign producers to target the domestic markets, the operating profits of domestic firms in those markets shrink whatever their productivities. On the other hand, some domestic firms gain access to foreign markets and get additional profits from their foreign ventures. These are the firms that are productive enough to cope with the additional costs of foreign activity (such as those due to transportation and remaining administrative duties or institutional and cultural barriers)."
3.So-Called Free Trade—Bad Policy and Wrong Debate - Critical of unbridled free trade, it argues that free trade does have serious "equity" issues and needs to be critically analyzed.
"Nineteenth century "free trade" theory may work well in a textbook, but it has profound conceptual, economic, social, environmental and political shortcomings in our real 21st century global economy."

4.Better Regulation for Freer Trade -  Focuses on the reality of "global supply chains" and argues that one needs better "regulation", in terms of standards, to take advantage of this 21st century reality.
"Over the past three decades, the production of goods—from electronics to food, clothing to cars, and medicines to furniture—has changed. Low-cost shipping, fast and reliable information communication technologies, and tariff reductions have allowed companies to unbundle and outsource manufacturing stages and intermediate services to specialist suppliers around the world. These global production models now dominate international commerce, with intermediate products comprising 56 percent of the global goods trade and 73 percent of global services trade."
The debate on free trade vs. protectionism is perhaps eternal and never changing. What changes perhaps are the contours of where to draw the line and what is acceptable. How much of free trade and how much of protectionism is a difficult question. Multilateral trade rules exist to answer some of these questions. However, interpretative flexibilities do not always provide clear answers. Is there a clear answer at all?

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