Protectionism and Free Trade
Protectionism is the practice of the government putting limits on foreign trade to protect businesses at home. Many companies want to sell what they produce at home. They often want to keep out foreign competitors. For example, rice farming and auto production are two major contributors to the Japanese economy. To limit competition from other countries, Japan practices protectionism in these segments. Some countries also do not want to share what they produce with other countries. Reasons to restrict trade include the following:
Foreign competition can lower the demand for products made at home.
Companies at home need to be protected from unfair foreign competition.
Industries that make products related to national defense (such as satellites, aircraft, and weapons) need to be protected.
The use of cheap labor in other countries can lower wages or threaten jobs at home.
A country can become too dependent on another country for important products such as oil, steel, or grain.
Other countries might not have the same environmental or human rights standards.
Trade Barriers To limit competition from other countries, governments develop trade barriers. For example, the United States and Brazil both produce sugar, but Brazil can sell it for less than the United States can. The U.S. government can protect U.S. sugar producers in three different ways: with a tariff, a quota, or an embargo.
A tariff is a tax placed on imports to increase their price in the domestic market. By placing a tax on sugar from Brazil, the United States can make it more expensive than American sugar. A quota is a limit placed on the quantities of a product that can be imported. If the United States allows only a small amount of Brazilian sugar into the country, most Americans have to buy American sugar. An embargo is a ban on the import or export of a product. Embargos are rare and usually are used against another country for political or military reasons.
Economic or foreign policy often determines which countries trade with each other. Free trade occurs when there are few or no limits on trade between countries. Supporters of free trade think all countries should be free to compete anywhere in the world without restrictions. Free trade offers several benefits:
It opens up new markets in other countries. There are more than 298 million people in the United States, but more than 6 billion worldwide.
It creates new jobs, especially in areas related to global trade, such as shipping, banking, and communications.
Competition forces businesses to be more efficient and productive.
Consumers have more choices in the variety, prices, and quality of products.
It promotes cultural understanding and encourages countries to cooperate with each other.
It helps countries raise their standard of living.
As the world economy becomes more global, many countries are moving toward a free trade system. To reduce limits on trade, nations form trade alliances. In a trade alliance, several countries merge their economies into one huge market. For example, NAFTA (North American Free Trade Agreement) combined the economies of the United States, Canada, and Mexico. As a result, it is easier for the United States to buy oil from Mexico and to sell its cars there.
Free trade is good in general, but it is not without problems. Some people opposed NAFTA because they feared some workers would be displaced when trade barriers were lowered. Opponents predicted that some high-paid U.S. jobs would be lost to Mexico. That did happen in areas where Americans and Mexicans were competing. Those in favor of NAFTA predicted that trade among all three nations would increase dramatically, stimulating growth and bringing a wider variety of lower-cost goods to consumers. Indeed, that has occurred since the passage of NAFTA. Despite the early controversy over NAFTA, the alliance has resulted in various business projects between the three countries.
Some of the major trade alliances in the world today are:
North American Free Trade Agreement (NAFTA): United States, Canada, and Mexico.
European Union (EU): Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom
Association of Southeast Asian Nations (ASEAN): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam
