Protectionism and Free Trade

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1. Introduction

Today’s markets are mostly global and therefore influenced by many factors, which also lead to massive financial crises, like in the actual situation, or even to times of an economic boom. After centuries of market development, they emerged into global markets through technological advancement, improved communication and transportation possibilities and political decisions like the liberalisation of markets.

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Simultaneous to the globalisation process and the worldwide spanning of the markets, the influence of the national government as well as the influence of supranational institutions (e.g. The World Trade Organisation, WTO) arose. Specific market rules were defined in the General Agreement on Tariffs and Trade (GATT) and other regulations. As much advantages the globalisation brings, there are also disadvantages, mainly in the form of governmental barriers to restrain trades through methods such as tariffs on imported goods, quota arrangements and other governmental regulations. These measures which can be outlined as protectionism are one of the main impacts on global trade and also the contrast to free trade, in which governmental barriers are kept as low as possible. Another factor that is playing a bigger role in an advanced internationalized work of a company is the effect of foreign exchange. The author will describe all the mentioned points and apply them to a case study which will be the recent trade dispute between the USA and China, concerning imports of tyres to the United States as well as imports of car parts and chicken to China. Furthermore, the author will describe related business strategies, which are the absolute advantage theory, the comparative advantage theory and the game theory. All these theories are based on the idea of free trade. To analyze free trade and protectionism you need to see both in a contrast with arguments for and against each of both ideas.

2. Protectionism and Free Trade

The term protectionism describes measures of countries to hamper imports into their territory. The competition gets tougher for companies that try to export into this specific country and they can not use any comparative advantages. Countries mostly try to protect specific branches or companies, when they are not competitive on the global market and to support an undisturbed development of a branch which is trying to get competitive. Most popular measures that belong to protectionism are governmental policies concerning tariffs, quotas and other regulations. There are many different forms of these regulations, of which the most important should be described in general now. Tariffs are determined on imported goods to raise their price on the domestic market. It also may be determined on exported goods to hold domestic companies from exporting their goods and rather sell in in the local market, but export tariffs are applied very rarely. Quotas reduce the quantity of imported goods through the arrangement of a maximum of goods in a given time that can be imported.

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