Protectionism and Free Trade Principles of Economics: Research Paper

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Protectionism and Free Trade

Principles of Economics:

A Discussion on Protectionism and Trade Liberalization

In the convoluted world of discussion over the future of developing countries, rich nations seem to make all the decisions, regardless of whether they benefit or harm the former group, or so it seems. This supposition is debated heatedly by those concerned and by external actors, especially when it comes to deciding whether trade liberalization is the right modality through which to aid the developing world, and especially when it is conducted through financial means, such as those involving the International Monetary Fund (IMF) loan programs. What is certain is that developing nations must fulfill quite a rigorous number of criteria to even begin to even start the qualifying process of joining the rich nations' club. The gatekeeper is, of course, the IMF, an organization that ensures that trade liberalization is complied with in order for developing countries to qualify for financial aid, or loans. This policy, regardless of intent, is unfair to some, especially in light of the history of developed countries (i.e. formerly protectionist nations), and many posit whether trade liberalization is, in fact, something that all must undertake, given the different and unique structures each country contains. And hence the debate cycle continues.

This paper will analyze the various 'hoops' through which developing countries must jump in order to meet the standards imposed upon them by the wealthy world, and will strive to give an answer to the question of whether current trade liberalization policies are fair, and if so, to what extent. In order to begin to answer the above-stated question, one must undertake an analysis of the various components of the argument presented in this paper. First, a history of the economics of trade will be described, with a few theories intertwined. Second, a short description of IMF policies and how they have affected developing countries will also be provided. Lastly, case studies that illustrate success or failure of these policies will also be described, in order to see whether trade liberalization, protectionism, or a combination of the two is the right recipe for success.

Historical Basis: Economics of Trade

The world has changed dramatically since the 18th and 19th centuries, when most of today's developed countries were developing. During the times when the United States and the United Kingdom, as well as many countries in Europe and Asia, some of whom are today's economic and financial frontrunners, were striving to survive, there was no helping hand, no advice imparted, and certainly no 'one size fits all' model to help these countries succeed. Yet they have succeeded nonetheless. The question to ask, then, is what has made these countries so successful on the world stage, and what they can do to help those in need today develop and achieve the same kind of growth and stability.

The answer is somewhat simple, yet in order to understand it, one must understand the way history has treated not just such concrete cases, but also how theories have developed to bolster inefficient or successful enterprises. Of course, in order to truly understand the specificities of the above-stated model, one must analyze each country in particular, complete with its unique characteristics, and build a model upon which one may then be able to assert or deny certain claims of success or failure. Due to time and length constraints, however, this would not be a successful enterprise, and will be limited to a short history of theory and practice, beginning with the latter. Thus, this section will begin by describing the economics of trade, as they have developed since the times of Adam Smith, the father of political economy.

Mercantilism

To begin, one must go back to Adam Smith and must first note that before this man's revolutionary ideas changed the world, mercantilism, a philosophy that stressed government control over foreign trade, reigned supreme. Mercantilism was believed to be of the utmost good for a nation for a few reasons. First, it ensured a balance of trade, and due to times when mercantilism was in favor (i.e. when gold reigned supreme), this made sense (LaHaye, 2008). Thus, during the centuries in which mercantilism controlled business ideals, most nations dealt with gold rather than money, for obvious reasons (i.e. banks could not be trusted). A second reason for why mercantilism was favored from the 16th and until the 18th century was because many believed it gave an advantage to more powerful, more populous countries, or those countries that ruled the world, such as England and France (LaHaye, 2008).

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Yet another reason for why mercantilism was so widely accepted was because it protected, for better or worse, the domestic economy and allowed those who controlled it to get richer and richer (LaHaye, 2008). Furthermore, during a time when allies were not to be trusted and technology or industry did not truly exist, keeping things domestic was, often, the only thing a merchant or businessman could do to not go out of business.

Free Trade

As logical as the above theory seemed, Adam Smith, and his free trade philosophy changed it all. Smith is considered the father of modern economics for a very clear reason: he simply created it all. Smith is also the reason why the UK and the U.S. are, for reasons mentioned above, leading the world of today. In order to delve into the very core of what Smith was trying to say, one must simply understand that this man concocted the justification for free trade in a time where nobody else had even thought of such an option. In his masterpiece, The Wealth of Nations, Smith not only provided an understanding of economics of the time, but also aimed to find better ways in which to enrich his country and thereby enrich others with whom his country would potentially trade. Furthermore, Smith also coins concepts such as the division of labor, a thing which today enables countries to engage in free trade with great benefits are results (Smith, 1776). Lastly, Smith provides a scathing but logical critique of mercantilism, and for good reason. He states that mercantilism conflates value, due to its use of precious metals (i.e. bullion), and thus cannot truly show the wealth of a nation, which should be measured with good s and services created by said nation (i.e. gross domestic product, GDP) (Smith, 1776). Lastly, to drive the point home, Smith argues that by limiting oneself to mercantilism one limits his markets or his horizons and, thereby, his wealth. However, with free trade, the wealth potential is limitless, for one can engage in free trade with any country (Smith, 1776).

Trade Theories Summary

The history of trade theories presented above and exemplified by two of the most important ones that have shaped both history and practice today, is important to mention here. Since history is known to repeat itself, for instance, one can truly see examples in which both these theories shape our world. For instance, mercantilist ideas are present in today's working classes, especially with regards to the auto industry, and free trade is advocated by the U.S. And other rich nations in order to expand their markets and help others expand as well. Yet this latter statement must be further analyzed and verified, which is what the next section will undertake.

IMF Policies: Causes and Effects

The theories described above are just one piece of the metaphorical puzzle. Other important theories are expanded upon by Johan Galtung (i.e. dependency theory) and Neo-mercantilists (i.e. specialization theory and its specificities, contents and discontents) (Ferraro, 2012). Though these camps are opposites and the theories are worth mentioning, they will not be expanded upon, for they simply build upon those previously analyzed in the first section. What is important to note is that, as aforementioned, both theories were utilized in the past, and both have resurfaced in the present, and will surely resurface in the future. For this reason, and for the reason mentioned above related to the uniqueness of a nation and the need to help development through specific analysis, it is vital to recognize that a potential mix of the two major theories, or of the more recent ones described by such individuals as Galtung, may offer a solution to the development dilemma.

IMF policies are clearly very top down. Whereas such theories as the one posited by Galtung reject the 'one size fits all' model, as well as the concept that those states modernizing today will go through the same stages as those in the past, the IMF is very much against such 'free' thinking and instead contents itself with leading countries through the same path for development, and therefore for loan-retrieval and retention, regardless of the specific needs a country may demonstrate. What the IMF must do, first and foremost, is recognize that those countries the modernized in the past were nowhere near the same as those developing today. Not only were the countries different, but the world was….....

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