Question

Evaluate economists’ reasoning that favor further trade opening when estimated gains are relatively small in terms of world GDP and explain why countries resirt to protectionism.

Answer 1

Opening trade leads to countries specializing in the production of goods and services where they have a comparative advantage. This means countries will produce those goods and services where the cost is lower as they specialize in the production of it and then they can export it to other countries. They will import goods and services which they are not efficient in, as the cost will be high. Thus their imports will be cheaper than if they had to produce those goods and services which they don’t specialize in. Therefore, consumers get the benefits in the form of lower prices which is beneficial to them.

Lowering tariff barriers will promote trade and this will be passed on to the consumers in the form of lower prices. With increased trade, individuals get access to a variety of products for consumption. Exports will increase leading to increased incomes. Exports will be encouraged to increase efficiency by producing more and enjoying the benefits of economies of scale. With competition faced by domestic producers from exporters, they will be more competitive and aim at efficient production at lower prices. This will serve as an engine of growth for all countries engaged in free trade.

There are arguments against open trade and advocates of protectionism. Protecting domestic industries against completion is one of the strong arguments against free trade. This will provide time for the domestic industries to compete with foreign industries. Encouraging domestic production can help in the employment situation of a nation. This is a temporary solution as other countries may retaliate by setting up their own trade barriers.