Free Trade Vs. Protectionism

Free Trade vs. Protectionism

One of the greatest international economic debates of all time has been the issue of free trade versus protectionism. Proponents of free trade believe in opening the global market, with as few restrictions on trade as possible. Proponents of protectionism believe in concentrating on the welfare of the domestic economy by limiting the open-market policy of the United States. However, what effects does this policy have for the international market and the other respective countries in this market? The question is not as complex as it may seem. Both sides have strong viewpoints representing their respective opinions, and even the population of the United States is divided when it comes to taking a stand in the issue. After examining all factors on the two conflicting sides, it is clear that protectionism, from the side of the United States, is the only way the American industrial economy can expand for the benefit of its citizens and for its national welfare. The economy needs to get itself out of the huge deficit hole that it has created for itself, and lean towards protectionist measures. The dictionary definition of free trade states it as a policy of allowing people of one country to buy and sell from other countries without restrictions. This idea originated with the influential British economist, philosopher, and author of The Wealth of Nations, Adam Smith. He inspired the writings of great economists such as David Ricardo, Karl Marx, Thomas Malthus, and others. According to Smith, specialization and trade is the best solution to create a flourishing American economy, with its industries ruling the economic world. William H. Peterson, holder of the Lundy Chair of Business Philosophy at Campbell University, agrees with Smith's philosophy. He states that the idea of free trade allows the efficient use of economic resources and will promote international cooperation. One of the biggest examples of international cooperation is the Bretton Woods system that originated from a 1944 conference at Bretton Woods, New Hampshire. Those participants in this conference created three organizations to help regulate the international economy. The first is the International Monetary Fund (IMF) which was established with the idea of regulating monetary policy. One of the benchmarks of the IMF is the stabilization of exchange rates and the loaning of money to help stabilize countries with balance of payments deficits. The second organization established was the General Agreement on Tariffs and Trade (GATT) whose main focus was on a liberal trading order. Their mission was to reduce trade barriers on manufactured goods and to build-up the principle of most-favored nation (MFN) status. This would impose a sense of fairness between countries in that each was required to levy the same low tariffs on each others imports. The third and final organization sponsored by Bretton Woods is the World Bank. The World Bank's most ambitious aim was the fostering of economic development. This is accomplished through loans to struggling countries. In addition to the World Bank, the International Finance Corporation was annexed to provide loans to corporations who are seen to help aide in poor countries' development. These three organizations within the Bretton Woods agreement captured the cooperation of the global community due to the one thing they all found in common: a commitment to a free market and economic freedom. In the 17th and 18th century, the American revolution was triggered by the Sugar Act of 1764 and the Stamp Act of 1765. The Sugar Act imposed import duties on foreign molasses, sugar, wine, and other commodities. The Stamp Act provided a tax on all important documents, periodicals, almanacs, pamphlets, and playing cards. The colonists believed that these control practices were unfounded since they advocated "No taxation without Representation." These protectionist measures contributed to the conflict which led to the American revolution. Similarly, protectionism also led to the Civil War. During the Civil War era, the industrial North was goading the agricultural South through the highly disputed Tariff of Abominations of 1828 and 1832. This high tariff protected the northern manufactures while the South demanded a low tariff in order to trade its cotton for cheap foreign goods. Eventually, these conflicts led to issues of secession, which thus led to the Civil War. Through these examples, Peterson argued that protectionist movements have never succeeded in the past, which means that they will not succeed in today's economy. Peterson seems to have forgotten several factors in his analysis. Even though it is correct to use mistakes of the past economies as examples, he has forgotten the fact that the international economic climate is continually changing and is blatantly different from how it was during the times of the American Revolution and the Civil War. Peterson is using positive analysis by looking at "what will happen" to the US economy and the international economy, rather than looking at the issue using normative analysis and seeing "what should happen." What should happen should be seen in respect to the conditions of the modern American economy and the international market. What may have happened with past protectionist measures does not necessarily mean that similar conflicts will repeat in the present. By tightening the laxity of the American free trade policy, wars should not occur. Quite the opposite, wars will be prevented by eliminating the tenacious competition between the United States and the other nations. One major strategy used to manage trade differences between countries is regular economic summits among leading industrial nations to create economic policies. These economic summits were born in 1975 from the ideas of French President Valery Giscard d'Estaing who was looking for a solution after the demise of the Bretton Woods system and saw the need for international economic stability. These summits are held yearly with growing participation from the global community. The main goals at these summits is global economic stabilization within the context of important political issues. Brink Lindsey, a trade attorney in Washington DC, also believes that free trade will benefit the United States' economy. According to Lindsey, not only will producers benefit from free trade, but consumers will as well. The US industries will benefit from foreign markets and the drive for competition, so free trade should become the cornerstone of American policy. One of the most important trade agreements of the twentieth century that reflects this viewpoint is The North American Free Trade Agreement (NAFTA), which was signed in August of 1992 and involved the U.S., Canada, and Mexico. This agreement seeks to remove tariffs and other trade impediments