The second section of Thomas Friedman’s (2006) The World Is Flat discusses protectionism and NAFTA's free trade policy. Friedman argues that both policies are not enough by themselves and need to be accompanied by both domestic and foreign strategies. Decisions lead to externalities and the governmental strategy for monitoring these externalities is the study of political economy. While it is generally accepted that free trade leads to mutual benefits and growth while protectionism hinders the process of economic development (due to comparative advantage) the externalities from pure free trade could have greater costs than protectionism. The articles discussing this topic are examples of protectionist responses to increasing economic integration, the implicit costs of free trade and strategic trade policy incorporating elements from both free trade and protectionism. The first article is Protectionist Responses to the Crisis: Global Trends and Implications regarding the current European economic downturn. The second article is titled Is Free Trade Good for the Environment and discusses the environmental impacts of free trade. Finally, the article Free Trade and Protectionism discusses how the objectives of intl. trade can be satisfied through an integrated trade strategy in between free trade and protectionism.
The first article chosen, “Protectionist Responses to the Crisis: Global Trends and Implications discusses protectionist responses to the recent European Union economic downturn. The regional economic union suffered during the global economic downturn around 2009. With outsourcing and cheap labor removing chunks of production from the economy, stakeholders are immediate in their response demanding protectionist policies (Bussière, 2010). Because of the economic crisis, there is short-term incentive to adopt protectionist policy to keep as many factors of production employed as possible. This short-term solution only leads to small, short-term recovery and is unlikely to achieve its objectives. Surveys show that there has been public pressure for more economic protection since the mid-2000s and during the financial crisis. This is likely because the public typically represents the labor force of the economy and with the outsourcing of labor-intensive jobs to where the wage rate is low, protectionist policy to maintain the workers hourly labor job seems like a viable policy. However, thinking macroeconomically, labor-intensive products cost less make in lesser-developed countries where the wage rate is low. To continue employing resources in the home country to protect the domestic industry would be an inefficient allocation of resources. Essentially, it would be incurring more costs for the same product.
Understanding the macroeconomic consequences of protectionism and despite public pressure, no member of the World Trade Organization has resorted to full implementation of protectionism to date. The model-based simulation in the article shows that the impairment of the global flow of trade would decrease the rate of recovery from the crisis, as well as the long-term growth potential of the economy. Also, the evidence suggests that protectionism is unlikely to even correct the existing imbalances in the global economy. Therefore, protectionism, although positively intended, is not an effective policy for a country looking to recover and grow.
The second article researched is titled Is Free Trade Good for the Environment? The paper sets out to correlate the relationship between international economic integration and pollution concentrations in a country. With industrialization and mass production techniques comes the vision of a large factory blowing stacks of sulfur dioxide into the atmosphere. The costs of undergoing a production operation involve the costs of labor, capital and raw materials. However, a naturally occurring byproduct may be a damaging compound like sulfur dioxide. Disposing of the chemical compound simply by letting the smokestacks flow freely into the air results in no costs for the factory owner. However, as the sulfur dioxide mixes with the clouds and travels miles down the Jetstream, acid rain and other damaging environmental events may take place. Costs as a result of the business decision not only involve the costs of labor, capital and raw materials, but also the damage to the health of those affected by the pollution and the environmental degradation cause by the pollution emission (Antweiler, 1998).
Now, it initially appears that the more economic openness, the more factories going to places like China and Bangladesh resulting in further pollution and environmental degradation. However, the estimates used in the article combine technique and scale efforts resulting from the trade to conclude that “freer trade appears to be good for the environment”. This is because of theoretical microeconomic theory such as the learning curve, decreasing costs of production etc. Instead of clothing or car factories around the world, developing are production cities that cite all of the production of a certain good to a specific area. When all of the materials, labor, and capital are coordinated and the byproducts, waste and pollution from these production sites is organized and its removal coordinated, there is a net reduction in costs/pollution from these sources. As a result, and according to free trade theory, there is greater benefit to specialization in comparative advantage and free trade.
The article Free Trade and Protectionism discusses the notion of adopting both free trade while considering the case for protectionism. It is flawed to assume macroeconomic trade policy has to either involve full protectionism or full free trade and economic integration. Opposed to being discrete, the level of economic openness is a spectrum in which a country can exercise various levels of openness based on the country’s needs. However, in order for an integrated trade policy to work, cooperation on both sides needs to occur. If one country liberalizes its trading policy while its partner raises its protectionist efforts, imbalance will occur, and a bubble will build. One party will be receiving a greater portion of benefit than the other and this results in economic inefficiency. Many multinational industries according to this article have said they are willing to support free trade at home only if foreign markets became more open. Integrated economic policy can result in rising economies of scale and steep learning curves to international relations that that will result in meeting the objectives of international trade; maximum economic growth (Dimulescu, 2008).
But unregulated free trade has its costs as well. Exploitation of the labor force, illegal dumping and pollution disbursement, and quality sacrifice for greater profits are all issues associated with free trade. Not only that, but there are some domestic industries that are necessary to an economy and therefore need to be protected. This is why an integrated policy that focuses on both increasing global economic integration and protecting the industries that need to be protected on a reasonable level is the best way of achieving the objectives of international trade.
In conclusion, our world faces a stage of modernity unprecedented in human history. According to Thomas Friedman’s The World Is Flat, there are various forces responsible for the “flattening” of our world. Flattening appears to mean the globalization and increasing economic integration of macro-economies around the world. These ten forces make it easier for anyone to participate in international trade, as opposed to just big corporations with vast amounts of resources. As the global economy naturally moves to reach equilibrium, the inefficient allocation of resources will not be tolerated. This in mind, it appears that protectionism not only hurts international trade as a whole, but the country practicing it as well. However, unregulated free trade has its costs as well. In conclusion, an integrated trade strategy involving elements of both seems to be the best option for moving forward towards sustainable growth.
Antweiler, W., & Copeland, B. R. (1998). Is free trade good for the environment? Cambridge, MA: National Bureau of Economic Research.
Although slightly over 10 years, this article is a relevant article in that it is one of the founding analyses of international trade since the beginning of the World Trade Organization (WTO).
Bussière, Matthieu, Emilia Pérez-Barreiro, Roland Straub, and Daria Taglioni (2010) "Protectionist Responses to the Crisis - Global Trends and Implications." Occasional Paper Series - European Central Bank 110: 52. Print.
Dimulescu, B. (2008). Free Trade and Protectionism. Annals of University of Craiova - Economic Sciences Series, 1(36), 411-417.
Friedman, T. L. (2006). The world is flat: the globalized world in the twenty-first century ([New ed.). London: Penguin.
Pindyck, R. S., & Rubinfeld, D. L. (2005). Microeconomics (6th ed.). Upper Saddle River, N.J.: Pearson Prentice Hall.