International Economics

(Option2): Discuss why countries impose trade restrictions if ‘free trade’ is the best policy. On the basis of economic theory explain why the WTO is a good idea. Analyse also why WTO negotiations in the past had experienced difficulties.
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Table of Contents
HYPER13 HYPERLINK \l "__RefHeading___Toc408596065"HYPER141.0 Introduction3
2.0 Free Trade4
2.1 Market access5
2.2 Comparative advantage5
3.0 Trade Restrictions6
3.1 Import tariffs7
3.2 Quantitative restrictions7
3.2.1 Subsidies8
3.2.2 Standards and embargos8
4.0 Logic behind Trade Restrictions9
4.1 Protection of infant industries9
4.2 Anti-dumping policy11
4.3 National security12
4.4 Environmental sustainability12
4.5 Job protection13
5.0 WTO and Economic Theory14
6.0 Challenges Facing WTO in the Past17
7.0 Conclusion19
8.0 Bibliography21
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1.0 Introduction
Over the last several decades and more specifically since the World War II, international trade has witnessed a tremendous growth. The increase in the volume of international trade has been regarded as the primary cause of globalization which has seen world trade increase by over 8 fold since the end of the war. Today, consumers around the world are continuously enjoying a broader selection of goods with domestic products facing an increased competition from imports from other countries. Further, international trade has been associated with increased job opportunities, incomes, increased earning power and reduced prices. In essence, advances in technology and trade and capital markets’ liberalization which have resulted from increased trade agreements continues to increase the volume of international trade per year. Several organizations have been established in the post-World War II period with the aim of opening up the international market and increasing the flow of goods and services in the international market. Such institutions include the General Agreement on Tariffs and Trade (GATT), World Trade Organization (WTO), International Monetary Fund (IMF) and World Bank (Bagwell & Staiger, 2009). There are also other regional institutions such as EU which are designed to allow for the free flow of goods within a given region. Despite this, there are some detrimental effects of globalization which include but are not limited to political, economic and social disruptions. In this line of argument, countries while realizing the need for free trade and trade liberalization have continued to impose trade restrictions in a bid to reduce and mitigate the negative effects arising from free trade. Today, many countries still impose trade restrictions to protect their infant industries, as an anti-dumping policy and to maintain national security among other reasons. In line with the course requirement, this paper seeks to explicate the concepts of free trade and trade restrictions and how the two are interrelated. The paper, uses WTO as a case study, also seeks to give an insight into why countries impose trade restrictions in the view of the operations international trade institutions and the challenges that has befallen such institutions in the past.
2.0 Free Trade
Urata (2002, 21) defines free trade agreement as an agreement or pact between two or more countries to eliminate trade barriers such as import quotas and tariffs. In the recent years, many countries have altered their policies in order to dismantle trade barriers and allow for increased foreign investment and free movements of goods and services as well as labor. In this context, the term free trade encompasses more than just the free movement of goods and services but rather it suggests the removal of government imposed barriers to trade. It may also be taken to refer to the efforts of WTO and other trade agreements to reduce such barriers and increase trade liberalization.
Despite the fact that free trade is considered as an enemy to the objectives and goals of sustainability, there is a broad agreement between policy makers and economists that a well designed free trade is the main objective of international relations. It must be noted that such a purest form of free trade is yet to be achieved. Free trade as aforementioned involves the removal of taxes on imports and other non-tariff barriers such as subsidies in a bid to liberalize trade both by WTO and other bilateral and regional institutions/organizations. Efforts to liberalize trade has however been criticized on the grounds that they aggravate inequalities between different countries besides straining the environment via rapid industrialization (Berkshire, 2011, 239). However, free trade has also been argued as being the ultimate solution to sustainable growth and development in the global economy.
2.1 Market access
Most nations regard market access facilitated by free trade as a major benefit. Market access in this regard includes access to goods, international services, intellectual property and capital. It is important however to note that free trade provisions that may enhance market access for a given nation may turn to be discouraging to another nation. Berkshire (2011, 240) points out that even in case of a fully executed free trade, it would be impossible to simultaneously meet the welfare needs of a nation and its citizens. On the contrary, it would reallocate resources so that the advantageous will continue to gain more as compared with what the disadvantageous would lose and this would by extension lead to a general increment in global welfare. Given the fact that no country or economic actor would wish to remain in the losing end, trade liberalization goals will always differ (WTO, 2012). For example, while actors in the industrial sector would call for harmonization of environmental, health and safety standards, actors in the agricultural importers would push for elimination of subsidies in the country. On their part, actors in the pharmaceutical industry have often pushed for more protection in regard to trademark and patents.
2.2 Comparative advantage
One general agreement is that free trade allows countries to gain a comparative advantage among other mutual gains. In this context, an economy is said to be enjoying a mutual interest by focusing on production of goods and services, whose unique combination of factors of production allows such an economy to produce at reduced costs and more efficiently. Such economies can then trade their products/services with those products that they are not well equipped to produce and which are best produced by other economies (The Levin Institute, nd). In theory, this concept is known as theory of comparative advantage. The theory implies that economies stand to benefit from trade regardless of how well they are equipped to produce any particular product efficiently. The theory suggests that economies will only gain mutual gains if they specialize in the production of products which have the greatest cost and efficiency advantages. In line with this, economies should dedicate most of their resources to the production of products that they can produce with the greatest efficiency and buy other products from other economies. It must, however, be noted that the specialization as postulated in the theory of comparative advantage may not be fully practical in real world as no economy can exclusively specialize in production of one product. Further, a less developed country may be efficient in production of a given product but still lack the resources to transport the same to the international market (Bagwell & Staiger, 2009). Nevertheless, it is accepted that free trade/trade liberalization facilitates economic growth and development in that it allows for efficient production. However, while this may be the case, policy makers often manipulate trade to achieve a number of objectives. The following section examines the concept of trade restrictions and the reasons as to why governments’ intervention is still persistent despite the number of free trade agreements existing today.
3.0 Trade Restrictions
As in the case of trade deregulation, government imposed trade barriers have a significant effect on the flow of goods and services in the international market, economic growth and development. There are two primary methods used by governments to regulate trade; imports’ restriction and promotion of exports. (The Levin Institute, nd). Imports’ restrictions often assume two methods including import tariffs and quantitative restrictions.
3.1 Import tariffs
Import tariffs or what is generally referred to as import tax is set as a percentage of the total value of the import goods. The aim of import tax is to reduce the amount of goods entering in a country and to increase government revenue. Import tariffs raise the price of the imported goods or services as compared to the price of domestically produced goods. In this context, they are also aimed at protecting local producers from unhealthy competition from foreign industries by ensuring that locally produced goods remain competitive with imported goods. As such, when imports are priced higher as compared with locally produced goods, then the local consumers will opt to consume local goods even if the imported products are considered as being more superior in terms of quality. Import tariffs vary from one nation to another and from one product to another (Bagwell & Staiger, 2009). It is also important to note that while many products are subject to certain levels of import tax, some of them are not taxed at all but this is dependent on regulatory agenda and the ability of a country to produce such products.
3.2 Quantitative restrictions
Quantitative restrictions on the other hand are aimed at restricting access to some imports. Such products are thought to be expensive in reference to the law of demand and supply. As such, many governments impose quotas on certain goods and services. Import quotas are aimed at controlling the amount of goods that can enter a country during a specific period of time. These quotas may however be subjected to specific products while remaining non-existent for others. Through quotas, the government is able to control the amount of a specific good in the market which by extension raises the market price of such a good (WTO, 2012). This in turn enables local producers to expand domestic production and to trade their produce at a higher price.
3.2.1 Subsidies
In addition to import tariffs and quantitative restrictions, governments may use subsidies for trade regulation. Subsidies are designed to offer support to local producers thus making locally produced products to be competitive to imports. They help local producers to undercut the prices offered by international producers both locally and internationally. For example, the government may offer subsidies to agricultural producers to increase production as well as to reduce demand for imported agricultural produce (Baron & Kemp, 2004, 5655). Equally, the government may offer subsidies to exporters of agricultural produce to bolster them in the light of international competition.
3.2.2 Standards and embargos
Standards can be defined as laws and regulations used by governments to restrict the level of imports in the country. Such standards include but are not limited to health and safety standards for imports. Such standards may be set higher as compared to standards governing domestically produced goods. These standards are common on consumables such as horticultural products and other fresh produce. Embargos on the other hand are aimed at halting the import or export of a given product in or outside a country. Embargos are usually put in place out of political reasons but some countries use them to regulate trade flow and require traders to have special trading licenses (Poole, 2004, 4). By placing the condition that domestic importers must have import licenses, the government can restrict trade flow by reducing the number of licenses issued. Export licenses have also been employed to reduce trading activities with specific countries or to regulate the price of locally produced goods.
4.0 Logic behind Trade Restrictions
There are various reasons as to why governments continue to intervene in trade, imposing restrictions while still advocating for the concept of free trade.
4.1 Protection of infant industries
Of the main arguments used by governments in imposing trade restrictions is that of protecting infant industries and local producers from unhealthy international competition. More specifically, deregulation of trade has been accused of posing an extinction threat to infant industries. In this line of argument, most governments impose trade barriers to protect such industries up to the point where they can be able to sustain themselves. It is important to note that mature industries such as in the case of pharmaceutical industries still demand protection from the government in form of trade restrictions. One main criticism of this argument is that competition is aimed at enhancing performance of industries and that imposing trade restrictions necessarily inhibits the true purpose of competition in the economy (Bagwell & Staiger, 2009). Further, this argument has been criticized on the basis that it is only those with political connections and financial stability who are true recipients of protection.
One rebuttal to the above criticism is that competition would only be beneficial to local infant industries if the price of their produce equals that of imports or where the importing country and the exporting country enjoy the same level of resources in regard to the production of a specific good or service. However and as aforementioned, different countries have different resource endowments and thus the cost of production of any given product will differ from one country to another. By extension, disparity in resource endowment and cost of production brings about a disparity in the price of local and import goods (WTO, 2012). In this context, infant industries often find themselves competing against well established producers and who enjoy low production costs.
Another rebuttal is that competition would only be fair and beneficial if industries in the same sector enjoyed the same treatment from their respective governments. It has been noted in the above discussion that trade restrictions and regulation differs from one country to another. For example, some governments have been known to subsidize some of their industries or to impose fewer restrictions thus giving them an advantage of same foreign industries. Many developing countries have fewer or non-stringent environmental regulations as compared with developed countries which often impose high compliance costs. While this may still benefit consumers as prices would be low, industries operating in economies where there are more restrictions will be subjected to unfair competition. In this line of argument, it is only fair for governments to protect their infant industries up to a point where they achieve favorable economies of scale (Bagwell & Staiger, 2009). Where economies of scale allow local industries to gain a comparative advantage over foreign producers, protection will enable then to gain better economic efficiency.
4.2 Anti-dumping policy
Another argument in support of trade restrictions is that foreign producers tend to dump their excess produce in local markets in form of exports. In this regard, the term dumping is used to refer to the act of foreign producers to se...