Roderick Christian A.

Pinero
International Economics
Protectionism or Free Trade

The purpose of this paper is to present the arguments for and against protectionism and free
trade and to choose which trade position I prefer.

Protectionism:
The first trade position is protectionism: this is defined as the theory, practice, or system of
fostering or developing domestic industries by protecting them from foreign competition through duties
or quotas imposed on importations. Thus protectionism is also labeled as trade barriers, although it has
differing purposes why it is applied, because the means to achieve this purposes will ultimately limit the
trade transactions between two countries.
The practice of protectionism can take different forms in the trade policies of a sovereign state
such as import quotas, tariffs, subsidies or other trade barriers or restrictions which are considered to be
non-tariff such as quality standards and health regulations. These are classified as non-tariff barriers
because its main purpose for its imposition is not for the advancement of economic gain but for other
sociological or national purpose such as health and safety or the advancement of nationalism. However,
this is worth mentioning because most often than not it also act as a trade barrier.

Trade Barriers:

Tariffs: - also called customs duties is a tax levied on goods entering a country (imported goods). This
causes the price of a given commodity to rise in the same manner as an indirect tax (VAT) would. Tariffs
may be imposed to raise revenue – but in some countries this may only be incidental because it serves a
different purpose which is to protect certain sectors of the economy from overseas competition.
The effect of tariffs on the economy is to drive the prices of imported commodities up, while the
prices of locally produced commodities with the same quality or lower (which serves the same purpose)
remains the same or much worse drives the general prices of the commodities up. In the latter case, the
end consumer pays for the use of a commodity at a higher price because of tariffs. This causes a
theoretical loss to the customers while the local suppliers and producer would generate a profit, not
from the increase in economic activity but due to an increase in price due to the imposition of tariff.
Import quotas: - this is a limit on the quantity of a particular good or commodity that may be imported.
In this scenario, supply level in the domestic market is lower than that under a free-trade situation
which drives the prices of a given commodity up. The effect on the economy is the same as the
imposition of tariff as a trade barrier. However, because quotas cannot be exceeded they are more
effective at restricting imports than tariffs, but they are generally difficult and costly to implement.

Subsidies: - this is a payment made to domestic producer which effectively reduces their cost of
production. As a result domestic producers can set lower prices making it relatively cheaper than the
same comparative product which is imported.

The general effect of these trade barriers is to insulate the domestic market from foreign
competition. It has been argued that these industries become artificially competitive. Artificial –
because the growth of the company does not come about due to operating efficiency or economic
growth but due to the protection given by the sovereign government.

The general problem that is created by trade protection is that firms operating in industries
which are protected might become less efficient producers because they lack the efficiency-stimulating
effect of greater competition. This would mean that they use more resources than they would
otherwise cause an inefficient allocation of resources. In cases of subsidies, aside from inefficient
resource allocation, the government spends money in these subsidies and affects its fiscal policy which
might cause budget deficits. Subsidies does not have long term sustainability, once the government
stops it, this would cause a rift in the economy.

Economic Arguments for Trade Barriers:

1. To protect infant industries: infant industries are those which are not yet competitive but have
the potential to become one eventually. With growth come economies of scale and the
possibility of introducing new technology. Both of these can lead to a lower cost of production
and eventually a lower price, thus becoming competitive.
It has been argued that it is difficult for a new industry to become compete initially with
established foreign companies. Thus, protection is necessary to allow these industries to
develop to the point that it can compete. To enable this growth to take place, it is necessary
 initially to place restriction on competing imports. Once the firm or industry has become
competitive the trade barriers may now be removed.
However, this strategy has some complications. Firstly, it is difficult to identify the
industry which has the potential for growth and secondly, once protection has been given it is
difficult to remove.
2. To promote diversification in trade: protection is applied to an entire sector of the economy and
is not limited to a single identified industry. This is done in order to protect the economy from
risks due to export fluctuations. If an export transaction of one industry is affected, the
economy has an alternative sector that minimizes the negative effects in fluctuation. It is found
therefore to be desirable to improve the competitiveness of alternative exports. But in order to
achieve this, it must be given at least temporary protection from foreign competition.
3. To combat unemployment in the domestic economy: one of the effects of international free
trade is to eliminate in efficient competitors. In most instances, the firms or industries which
are eliminated due to stiff competition are the domestic ones. Therefore, in order to avoid
these situations, sovereign governments result to protectionism.
4. To promote economic nationalism (supporting domestic industries): this reasoning is reflected in
statements such as “buy Filipino”. Supporting domestic products allows this industry to grow
hopefully achieving comparative advantage in terms of competition in international trade.
5. Promotion of national security: this is one of the strongest arguments for protectionism.
Sovereign states whose basic commodities such as oil and food are supplied by foreign firms are
most likely to be influenced in the creation of national policy. Therefore it is imperative, in
order to maintain national sovereignty and identity, to protect domestic market from foreign
competitors.
6. Differential wage rates: the concern that is wished to be addressed is that employees in
countries with high wage rates such as the United States or other developed countries would
lose their jobs because companies wish to find cheap labor for their production or operations. A
clear example would be the move of most western factories to China, where labor cost is a
fraction of that in the developed countries.
Non-Economic arguments for protectionism:

1. Strategic purpose: it may be that the government sees a necessity to promote certain industries
for security especially in times of war. This may involve the protection for industries producing
vital oil or rubber supplies, or the promotion of industries such as shipbuilding, aircraft or
munitions manufacturing.
2. Environmental reasons: Today environmental concerns have gained significant importance. This
is because of the increasing symptoms of global warming and the depletion of natural resources
and the extinction of species due to irresponsible exploitation, use and disposal of garbage. For
governments that put a premium on the protection of environmental resources, they opt to
restrict firms that pose a possible threat even to the extent of foregoing monetary and
economic gain.
3. Quality control: this non-economic argument is also important in order to avoid flooding the
economy with products which are of substandard quality. This is of particular importance to
food and drugs. Therefore import product must meet the minimum requirements that are
imposed by the government in order for it to be acceptable for import.

Free Trade

The premise in economics is that it deals with limited resources and the end goal is to find the
method that can efficiently allocate this limited resource to meet human wants and needs. Thus,
international trade is important to most nations because there is an unequal distribution of wealth and
economic resources and there is no single country can produce all the goods and services demanded by
its consumers. Through international trade, individual nations can make the most efficient use of their
limited resources through specialization.

Reasonsy why countries trade:

Countries trade with each other because of the mutual benefit derived from the transaction.
This principle is basic to understanding why economist generally agree that protectionism are usually
not beneficial in the long term. Trade can be beneficial when two countries possess different natural or
capital resources; when they have differing preferences; when there is difference in productivity; and
when there is a difference in opportunity cost.
Difference in Resources:
Countries are often motivated to trade because they have different natural or capital resources.
What might be an abundant resource in one country might be something the other country lacks or vice
versa. Therefore in order to meet its mutual needs for the commodities, both countries would enter
into a trade transaction.
For example Saudi Arabia, whose natural resource is mostly sand and oil might be interested to
trade with the United states or other countries for their agricultural needs or vice versa. Another
example would be United States which has a high capital resource and China which has a high labor
resource. Thus United States would likely to export capital intensive products while China would tend to
export labor intensive products.

Difference in Preference:
Trade would also tend to occur even if countries have identical resources because of differing
preferences. For example Britons prefer tea over coffee while Americans prefer the opposite. Even if
both countries has the same quantities of tea and coffee, trade would be beneficial. By trading coffee
for tea, the British would sacrifice something of less value, which is coffee, for them in exchange of
something with a greater value, which is tea. The opposite analysis would apply for the Americans.

Difference in Productivity/Absolute advantage:

Trade offers an opportunity for countries to specialize and enable it to produce the goods that
they can produce most efficiently. As a result, trade enables the world to satisfy more wants because it
allows resources to be used more efficiently. A situation in which a country can produce a certain
commodity more cheaply, in terms of resources used, than its potential trading partners is called
absolute advantage.

Differencce in Opportunity Cost/Comparative advantage:

A country has a comparative advantage in producing a good if it could expand production of the
good at a lower opportunity cost (in terms of reduced production of other goods) than could its
potential trading partners.
The Economic Performance of the Philippines after its entrance to the World Trade Organization in
January 1, 1995:

Gross Domestic Product based on Purchasing Power Parity per capita (1980-2009)

4000

3500

3000

2500

2000

1500

1000

500

0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

The GDP per capita shown above shows an increasing trend from 1980 -2009, however it must
be noted that from 1980 – 1987 the Philippines was under the dictatorship of the late Ferdinand Marcos
in which these data may not be reflective of a free market economy. The graph also reflects a declining
trend between 1984–1988; this reflects the economic effect of the political instability caused by the
people power revolution which culminated in the ouster of the late dictator Ferdinand Marcos.
During 1997, Asia experienced a financial crisis which can be seen in the decline in GDP for the
year 1997-1998. However the impact of the crisis to the Philippine economy is minimal compared to its
neighboring countries like Thailand and Indonesia due to strict regulations by the Philippines on its
financial institutions.
The graph shown above is not enough to evaluate the economic activity of the country because
these figures are affected by inflation thus, the growth reflected in the graph might be either caused by
the general increases in prices or economic activity.

GDP at Constant Prices (1980 – 2009)

0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-2

-4

-6

-8

-10

The GDP at constant prices tries to eliminate the effect of inflation in evaluating economic performance
through GDP. Thus prices are measured at a base year therefore this is reflective of economic
performance measured in volume of economic activity. The graph shows that economic activity in the
Philippines is not quite stable as reflected in the GDP (PPP) per capita. Still significant changes occurred
during the people power revolution (1984 – 1988) and the 1997 Asian financial crisis. However, steep
decline can also be noted on 1991, 2001 and 2009.
It should be noted that economic activity is always affected by political stability or instability.
Although the Filipino people was victorious in their bloodless political revolution which culminated in
1987, the first few years of the Aquino administration has been marred by more political turmoil with a
series of coup attempts to oust the late President Aquino from office. Her presidency has also been
criticized with poor economic reforms, unproductive government spending, and the accumulation of
public debt (Exposed in the book Greed and Betrayal). These series of events caused the decline in
economic performance.
During 1991, the Philippines joined the World Trade Organization (WTO) and signed the General
Agreement on Tariffs and Trade. The purpose of the organization and the agreement is to minimized
and eventually eliminate trade barriers (protectionism) in favor of free trade. Although the economic
performance after the agreement increased, as shown on GDP at constant prices, the increase is short
lived because in 1997 the economic bubble exploded resulting into economic crisis.
It should be further noted that free trade opens the domestic country from multinational
countries which is only interested in generating profit. Some of these firms or investors are speculators
which makes the domestic market volatile and subject to fluctuations. This can be illustrated by what
happened in Thailand during the Asian Financial crisis and the speculators which lead to its economic
collapse.
The significant effect of the EDSA dos can be seen in 2001, when people took to the streets once
again to demand the ouster of then President Joseph Estrada after the lawyers of the government
walked out of the impeachment proceedings when the senators voted against the opening of a crucial
evidence which links the former president to corruption.
Conclusion:
Looking at the History of the Philippines, it has always been reliant on foreign aid and
investment to boost economic performance and activity. Thus, the numbers on the GDP does note
accurately state that the free trade agreement has significantly improved the economic productivity of
our country. Although it has in fact drawn foreign investors into the country, however it puts our
sovereignty in terms of economic and government policies at the mercy of these countries in which the
Philippines has continually been relying for support.
I am not completely against free trade, but I strongly believe that every country should prepare
itself politically and economically before it considers joining free trade agreements. This means that
countries should strengthen its industries first in order to hold comparative advantage over its trading
partners.

www.dictionary.com
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Thompson: Economics, 2nd ed.
Stewart and Moodie: Economic Concepts and Application, 3rd ed.
Mankiw: Principles of Economics, 2nd ed.
Walsh: Economics, 3rd ed.
Gdp growth

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