FREE TRADE VERSUS PROTECTIONISM

ISSUE OF STRATEGIC CHOICE

At all stages of economic history, governments have used trade
policies to try and strike a balance between the interests of local producers
and the demands of global markets. The have sought to reap maximum
benefits from external trade factors to achive short term, medium-term and
long-term economic growth objectives. The competitive positions that
businesses and their countries enjoy considerably depend on their mode of
participation within forms of international economic cooperation. The scope
and interests of business sector, intron, has a significant impact on
governments and their choice regarding trade.
A theoretical framework. Trade policies cannot be absolutely free of
government regulation while the economic growth of countries, particulary
developing countries, depends both on their access to outside markets and
the level of openness of their domestic markets. In the academic literature,
views on the advantages of protectionism versus free trade have been in
constant flux. Long before Reinert or Stiglitz, mercantilists argued for the
need to rely on protectionism, highlighting trade protection policies
exclusively in terms of the need to accumulate domestic resources.
At the same time , proponents of free trade preach the use of external
markets as an incentive for stimulating domestic economic growth and
boosting production. Free trade as a basis of international commerce was
proposed for the first time by the classical political economists, Adam Smith
and David Ricardo, although Adam Smith in his work acknowledged subsidies
and lobbying as a means of putting pressure on government. It is therefore
difficult to fully accept Reinerts criticism of Adam Smiths theory, although
some of his empirical conclusions are quite strong.
Georg Friedrich List, a German economist, writer and politician who
authored the concept of protectionism and was a forefather of
enlightenment protectionism as a set of government policies supporting
emerging industries, criticized English classical political science for ignoring
specific domestic patterns of business development. According to him,
political economy, in contrast to international commerce, should build
theories based on empirical experience, and match proposed policies to the

needs of time and the unique position of each nation, with due attention
given to the needs of the future and of mankind. It must, therefore, stem
from philosophy, politics and history .
In Russia, one of the pioneering studies has been the book by V.
Vitchevsky Trade, Customs and Industrial Policies of Russia From Peter the
Great to the Modern Day, published in 1909. In his book, the author
employed two terms to describe policies - conservative and protectionist,
where conservative measures are aimed at achieving security and cannot
be accepted as promoting economic growth, whereas protectionist policies
are those informed by interests of the national economy and domestic
producers.
The link between trade and macroeconomic policies was highlighted in
the Keynesian theory of economics. John Keynes argued that trade restriction
policies may help promote short-term national aims but are neither efficient
in a long-term perspective nor supportive of growth in world trade. One
might argue, therefore, that long before Reinert and Stiglitz, individual
countries and regions were considerably focused on trade policies.
As the world trade system evolved, new evidence was used to support
free trade arguments, although it is difficult to declare that these principles
had ever been applied in practice in the way they were formulated by Adam
Smith or David Ricardo. This was mostly due to such patterns of economic
development as growing competition, foreign exchange and financial
imbalances and other issues which required measures to protect and support
domestic producers and were viewed largely as examples of protectionism.
Given this level of economic interdependence, the efficiency of each
countrys trade policies depends largely on its commitment to apply these
regulations. One cannot rely exclusively on protectionist measures.
In modern economies, an increasingly greater role is being assigned to
trade policies aimed at supporting national producers on external markets
and setting priorities for attracting foreign goods and services. The 20082009 global financial crisis and continuing negative trends in many
developed and emerging economies have showed quite graphically that of
all the policies adopted to overcome or mitigate the effects of the crisis,
special emphasis has been placed on trade policies and the regulation of the
more sensitive markets. There seems to be much truth in what Reinert
maintained when he argued that there is still a need to choose which
businesses to protect and which not to. One cannot help agreeing with

Stiglitz and his criticism of tax breaks and other benefits offered to large
agricultural and utility companies for they create additional losses which
producers pass through onto the society .
Under this view, it is difficult to argue that the weak positions of
developing countries are exclusively the result of free trade policies pursued
in past years. However, one cannot but accept Reinerts argument that it is
better for any country to have inefficient domestic industry than no industry
at all. This researcher argues that in order to first to allow it to grow
(protecting it with various forms of government intervention) and then
embark on free trade measures , a country would have to mobilize, in the
form of goods and services, the missing advanced knowledge and
technologies to facilitate gradual development.
It appears that todays discussion on protectionism versus free trade
should focus not so much and not only on defending the thesis of preserving
the level of development of various countries, as on two issues of principal
significance. First, the question remains whether the globalization of the
world economy and the emergence of a global system of regulation will
undermine the independence of national trade policies. Given this level of
economic interdependence, the efficiency of each countrys trade policies
depends largely on its commitment to apply these regulations. One cannot
rely exclusively on protectionist measures. In addition, abandoning
protectionism should go together with an elaboration of adequate strategies
to promote domestic producers interests.
The other issue is whether close links between states, stemming from
liberal trade policies and related instruments, will intensify conflict between
individual national economies. In other words, will ones own domestic goals
be achieved at the price of forcing other countries to lose their economic
position and competitiveness? It was this last issue that came to the fore
during the discussions in the run-up to the December 2013 Bali Ministerial
Conference, which, contrary to the expectations of many, was a success and
led to the adoption of a full package of agreements.
The trade facilitation agreement, which may become the first legal
instrument adopted since the WTO was established in 1995; a package of
agreements restricting export subsidies and agricultural support
programmes; agreements on food security, including those relating to
restrictions on food procurement by government these are the key issues
which may, going forward, underpin future growth in international trade.

Freedom of International Trade Under Globalisation. How truly

free is modern trade? The current system regulating the international
exchange of goods is based on the General Agreement on Tariffs and Trade
(GATT) whose aim after the war was to restore trade links based on
universally accepted and reciprocal principles, of which the most-favourednation (MFN) status and the national trade status were the most key.
According to the founders of that multilateral trade system, these two
principles were called upon to ensure that free trade could help restore the
world economy after the devastation of WWII. And although there is really no
objection to the freedom of trade principle as it stands, one should
remember that at the time when the GATT agreements were negotiated,
they reflected the predominant positions of a few individual countries, most
importantly the US, since obviously not all countries were in a position to
actively contribute to the international exchange of goods and offer industrial
products to world markets.
The last and largest GATT round, was the Uruguay Round which lasted
from 1986 to 1994 and led to the WTOs creation. Whereas GATT had mainly
dealt with trade in goods, the WTO and its agreements now cover trade in
services, and in traded inventions, creations and designs (intellectual
property). There are a number of ways of looking at the WTO. Its an
organization for liberalizing trade. Its a forum for governments to negotiate
trade agreements. Its a place for them to settle trade disputes. It operates a
system of trade rules.
Essentially, the WTO is a place where member governments go, to try
to sort out the trade problems they face with each other. The first step is to
talk. The WTO was born out of negotiations, and everything the WTO does is
the result of negotiations.
Where countries have faced trade barriers and wanted them lowered,
the negotiations have helped to liberalize trade. But the WTO is not just
about liberalizing trade, and in some circumstances its rules support
maintaining trade barriers for example to protect consumers or prevent
the spread of disease.
Hence, ever since GATT became the basis for international trade
negotiations, the MFN status had to be interpreted rather narrowly, with the

advantages of free trade not fully available to all participants in international

trade.
With growing competition, the emergence and consolidation of a few
global hubs of competition (the EU, the US, Japan, newly industrialized
economies, and China) has inevitably led to a new and diversified range of
protectionist tools. The history of protectionism in world trade suggests a
number of characteristic patterns:

selective protectionism policies targeted at individual countries or

individual goods;

sector protectionism policies to protect individual sectors,

predominantly agriculture;

collective protectionism policies pursued by groups of countries

against outsiders;

hidden protectionism measures of domestic economic policies

which, not infrequently, are unrelated to trade regulation;

superprotectionism (offensive or aggressive protectionism) protecting

the developed, powerful and highly monopolized industries;

private monopolistic protectionism relying on trade barriers resulting

from various agreements on markets, prices and terms of sales, as well
as trademarks and patent protection at an intercompany level. Such
arrangements set up obstacles to imports which are no less tangible
that those created by regular trade policy measures.

The growing arsenal and changing nature of trade policy tools have
impacted on the nature of free trade. The modern concept of liberalization of
international trade regulation, apart from lowering and removing barriers as
far as possible, also appears to provide for the harmonisation of trade
policies and the unification of their rules. This has given rise to an ongoing
search for relevant, efficient trade policies, and a new approach to their role
and objectives, taking into account the direction and pace of growth. It also
proceeds from the need to strengthen competitiveness both of firms and of
national economies. In this complex world of global competition, todays
protectionism is also fundamentally different from that of a few decades ago,
since it combines protective measures with hidden protectionism and policies
promoting national producers.

The drastic change in the implementation of protectionism and free trade

has also affected the so-called value-added chains. Since global production is
established through contributions from companies from both developed and
developing countries, it is no longer possible to argue in favour of
straightforward protection of domestic markets. A more flexible approach is
required, and effective trade policy strategies need a very elaborate set of
macroeconomic and industrial policies.
Russias Strategic Choice.For Russia, the highest priority at the
moment is to enhance competitiveness through greater efficiency in
domestic producers and stronger state regulation. Such competitive
advantages as Russias geographic position, its rich natural resources,
existing scientific potential, and leads enjoyed by some high-tech industries,
could help the country move up into the upper half or even the upper third of
the competitive rankings of the world economies. The low competitiveness of
this country is attributed to market patterns specific to Russia, and policies
pursued by firms and the government.
As lessons from Russia have graphically shown, any restructuring of
the national economy and its effective integration in the world economy are
impossible without a modern system of regulation in the area of foreign
trade. Laws passed in the early 1990s were, in the vast majority, in conflict
with the worlds prevalent system of regulation of foreign trade in goods and
services, foreign investment or foreign exchange regulation.
Enhancing competitiveness currently requires creating an enabling
setting (a competitive business environment) and setting priorities in support
of potentially promising areas of economic growth. In completing these
objectives, Russia will benefit from a more active integration in the world
economy and free trade to help promote Russian goods on world markets.
One might argue that removing certain protectionist policies will not
lead to the preservation of Russias positions as a producer and exporter of
exclusively mineral resources or other natural products but will, instead,
create additional incentives to modernize basic domestic technologies
through the inflow of new goods and services. One example is Russias car
industry, which has benefited from the liberalization of trade for assembly
plants. There is little ground for fears that production in Russia would fall as a
result of liberalized access to Russian markets for foreign goods. Russia has a
very large consumer market, and there is a consumer segment for every
type of goods. In addition, the lack of competition deprives Russian

producers of the incentive to improve and enhance their goods and services,
to the detriment of consumers.
On the other hand, each country has some industries that serve as a
bulwark of economic security: strategically important mining industries,
defence sector, agriculture, and others. These industries should be subject to
extremely cautious and well-reasoned policies. This is particularly true of
support offered to national producers on domestic markets or facilitating
their entry to foreign markets. For that, there is a huge inventory of means
and methods which, if applied efficiently, will not prejudice or violate key
WTO principles but allow for the combination of liberalized access to Russian
markets for foreign goods with the protection of national interests.
There is also a major and positive role for the so-called green box
support subsidies to national producers which come as part of government
policies to promote innovative processes, improve social conditions, equalize
the level of development across regions, as well foster a reliance on nonfinancial methods for organizing firm exports.
Russias accession to the multilateral trade system, based on the
principles of liberalized and broad global trade, coincided with some
monumental developments. The lack of progress in international trade
negotiations following the Doha Round, and their almost complete failure at
the Geneva Ministerial Conference in 2008 were offset by important
achievements at the 2013 Ministerial Conference. The agreement to offer
duty-free access to goods from the poorest developing countries may boost
trade from these countries and lay the foundation for increasing agricultural
subsidies there.
According to Karel De Gucht, the European Commissioner for Trade,
such policies will help boost investment in these countries infrastructure. In
addition, one of the key negotiated breakthroughs was the agreement on
trade facilitation, which is expected to considerably reduce costs involved in
foreign trade operations and cause trade to grow by USD 1 trillion.
WTO Director-General Roberto Azevdo argues that the WTO is in a
good position to uphold the true meaning of world in its title, since this
time the outcome of the conference will benefit all WTO members. They are
in Russias interests, too, since, for Russia, participation in international
economic institutions is a zero-option factor of economic growth and
enhanced political influence. However, broadly speaking, membership in a
major international organization will not result, in and of itself, in the desired

benefits or improved welfare. Participation in international organizations,

and, importantly, in the WTO, and balancing between open markets and their
protection and promotion of domestic producers, requires substantial and
sophisticated efforts, ongoing analysis and forecasting of trends, and
flexibility in adjusting national economic strategies in line with the challenges
of globalization.

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