Bradford School of Management

Module title: Business Economics
Submission date: January 5th, 2004

Liberalisation of Trade and reduction of protectionism

 Andreas Wellmann

Compare and contrast the arguments for and against the greater liberalisation of international trade and reduction of protectionism.

International trade has increased from $2 trillion in 1985 to over $ 6.4 trillion in 2002.¹ This impressive growth is primarily the consequence of various political and technological developments of the past 15 years. The political raise of Russia and Asia, particularly China, has extended the worldwide markets. At the same time, technological changes like the Internet have decreased information asymmetry and lowered costs for logistic services, which facilitated the development of international trade. Moreover, organisations like the World Trade Organisation (WTO) have helped to liberalize and deregulate worldwide markets. Today, all aspects of a nation’s economy are closely correlated to the economies of its trading partners. The world has become a ‘village’ and market players are able to interact and transact around the world within ‘real time’ (Carbaugh 2002). 

The liberalisation of international trade can either assume the form of a Free trading area (FTA), customs union, common market or an economic integrated region (Daniels, Radebaugh & Sullivan 2001). The recent ‘boom’ of greater international trade liberalisation can be partly explained by the economic laws of absolute- and competitive advantage. By nature, countries have distinctive immobile production factors and hence different relative production costs for the same good or service (Lawler & Seddighi 2001).² According to the absolute advantage model, a country can increase its overall output and productivity by focusing on its individual absolute advantage and therefore produce one good with fewer resources than another country (Sloman & Sutcliffe 2001).

Besides the theory of absolute advantage, the law of comparative advantage further reasons why trade between countries is beneficial. According to the concept, the overall output of two nations can be improved when the less efficientnation focuses on the production of those goods, which it can produce relatively less inefficient compared to the more efficient country (Husted & Melvin 2001). The more efficient nation on the other hand, should focus its production efforts on those goods, which it can produce with relatively higher efficiency. Consequently, the specialisation of countries on its ‘core competencies’ and the exchange of produced goods via free trade increase the global productivity and the variety of products available for consumption (Salvatore 1995).

Above and beyond these classical economic gains from international trade, a greater liberalisation of markets can be justified with additional arguments illustrated below in figure 1.

Figure 1: Arguments for the greater liberalisation of trade and reduction of protectionism

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Freer markets would foster countries’ specialization, which in turn enables them to additionally benefit from lower production costs due to gains in economies of scale. Furthermore, the competitiveness of countries would increase because of a larger market for input and output factors. This would consequently have a positive effect on consumers, who could gain from a bigger variety of products and advanced quality.

Moreover, a greater liberalisation of trade could help to strengthen the position of industrialized and developing export countries and act as an economic growth engine for them. New jobs would be created, which increases the GDP of such countries and thus raises their level of living standard. Also, an extension of international markets would have positive macroeconomic effects such as reduced domestic inflation risks and improved current account figures within the Balances of Payments. Finally, the greater liberalisation of trade could help to deepen international relations on a business and political level (Sloman & Sutcliffe 2001).

Although the above-mentioned arguments strongly support freer trade from an economic point of view, not all people agree with this direction. The arguments of people opposed to a greater trade liberalisation are usually built upon the key argument that not all participants gain from free trade (illustrated below in figure 2). Therefore, they support national protectionism in the form of quotas, tariffs or other trade restrictions (Daniels, Radebaugh & Sullivan 2001).

On a macro level, Third World countries could suffer from a greater trade liberalisation, because they tend not to possess the necessary bargaining power to agree on ‘fair and equal’ trade agreements with First World countries. Furthermore, the dependency on exports of such countries would increase, which makes them more defenceless to international economic and political developments.

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1 Source: www.wto.org/english/res_e/statis_e/its2002_e/its2002_e.pdf

2 Factors of production can be capital, skilled labour, raw materials, climate or location.