Free Trade versus Protectionism

Benefits of International Trade Increased variety of goods Lower costs Increased competition and better quality products. Enhanced flow of ideas

Costs of Free Trade Foreign competition may cause loss of jobs. National security may be imperiled if we are dependent on foreign goods during war time Growth of new industries may be limited due to intense foreign competition

Trade Barriers Trade Barriers are strategies that countries use to limit foreign imports in order to protect domestic producers from foreign competition. These types of policies are known as protectionism.

Types of Trade Barriers Tariffs are taxes on imported goods. They raise the price of imported goods above the price of domestically produced goods. Import quotas specify a maximum amount that can be imported during a certain time period. These are more effective than tariffs at protecting domestic industries, but the limited supply means that consumers will pay more for the item and that foreign producers will earn higher revenues per item. Trade embargos are a prohibition by a government on certain or all trade with a foreign nation.

Effects of Trade Barriers They increase the cost of goods and services to consumers. They reward inefficient industries by protecting them from more efficient foreign competition (comparative advantage ignored). They reduce the choices consumers had. They lead to trade wars and other trade disputes with other nations.

International Free Trade Agreements These agreements result from cooperation between at least two countries to reduce trade barriers and to trade with each other.

International Free Trade Agreements The North American Free Trade Agreement (NAFTA)- In 1993, NAFTA lowered the trade barriers among the U.S., Mexico, and Canada. The European Union – a regional trade organization made up of European nations that abolished trade restrictions among members and adopted uniform tariffs for nonmembers. Both of these have established free trade zones for member nations.

World Trade Organization The WTO was originally founded as GATT. Its purpose was to reduce tariffs and expand world trade. It now has three main functions: To ensure countries are acting according to their agreements To negotiate new trade agreements To resolve trade disputes