Unions in developed nations often oppose imports from low-wage countries and are strong

advocates of restrictive trade barriers to protect what they view as “unfair” import
competition. Is such competition “unfair”? Explain your answer with a well-constructed
argument and examples to illustrate your point(s).

Trade unions are on the decline now. In the past, when they were powerful, they did try to influence
government regulations on trade. According to the unions, trade barriers will protect industries,
especially those in their infancy. The unions are also of the belief that such barriers will reduce
unemployment and maintain prices of products that ensure reasonable wages for the employees
(Tachibanaki & Tomohiko, 2000).

The arguments for protectionism are (Edge, n.d.):

1. Sunrise industries
2. Dumping
3. Domestic employment
4. Self sufficiency

Sunrise industries have a high cost per unit and are at disadvantage over bigger established foreign
players. The argument is that these industries need to be protected. But what happens is that these
industries continue to be inefficient in the long term too because of the lack of pressure from
competition to reduce cost and improve quality.

Dumping is where foreign players export at a lower price than the normal price. The lower price is
supported by subsidies in the domestic country and is often below cost. Dumping needs to be
discourages as it is not competitive and can destroy the local industry.

The argument that protection is required to maintain high employment is not valid. Trade barriers will
result in inefficiencies. While free trade will adversely affect some industries, resulting in loss of
employment in those industries, it will fuel employment in those industries that are efficient. For
example, in Australia, the clothing, textile and foot wear industry was affected by free trade and
closed down but on the other hand free trade fueled mining, education and travel and employment
increased in these industries.

Self sufficiency is more socially and politically motivated and not based on economic theory. Self
sufficiency will result in higher cost of living, which free trade would have reduced.

Other arguments like diversification again result in inefficiencies and are contrary to economic theory.

In contrast to this view of trade unions, the theory of comparative advantage suggests that a country
should produce those goods that it can produce more efficiently than other countries and buy those
goods that it cannot produce that efficiently. The theory of comparative advantage also indicates that
when a country is open for free trade, it actually stimulates economic growth in the country
(Porter,Sauve & Subramanian,2001). Studies by OECD (Organization for economic cooperation and
development) support this theory and show that a 1% reduction in tariff on goods can generate $170
billion dollars (Love & Lattimore, 2009).

Going with the above argument, it only follows that countries with a low wage structure can be more
efficient in making some labor intensive goods as compared to other countries. These countries will
therefore export to the countries where the wages are higher. Trade barriers will prevent companies
from being efficient and by blocking free trade they are thwarting economic growth in the long run.
Trade barriers are therefore a short term solution and are actually detrimental in the long run.
Any action by governments that give an unfair competitive advantage to local firms over foreign firms
is called Protectionism. Trade barrier amount to protectionism. Protectionism results in lower quality
products, higher prices, less variety and high production costs (Love & Lattimore, 2009). It can also
be said that trade barriers are not sustainable as they are contrary to global economics, innovation
and efficiencies.

Australia has decreased it tariff levels from 36% in 1968 to almost 0 now. This has resulted in a
stronger industrial base, reduced cost and higher exports.

Further, the theory of competitive advantage has been found to be replaced by agreements between
nations. This is because the theory is only relevant when the competition is perfect and technology
has not changed. The Australian-Chile FTA ( free trade agreement) has resulted in market access
gains for exporters from both countries, access to government procurement markets, and IP
protection.

To conclude, the removal of trade barriers will benefit world trade and global welfare. Countries can
consider trade agreements instead of trade barriers, to boost trade as well as economic development
of their country and the world as a whole.

References:

Love, P. & Lattimore, R. (2009) OECD Insights: international trade: free, fair and open?
Ebrary [Online]. Available at: http//site.ebrary.com (Accessed 29 September 2011).

Porter, R.B., Sauve, P & Subramanian, A. (2001) Efficiency, equity, & legitimacy: the
multilateral trading system in the millennium. Ebrary[Online]. Available at:
http://site.ebrary.com (Accessed 30 September 2011).

Edge,K.,(n.d.)Features of the global economy: the reasons for protection. Retrieved from
http://hsc.csu.edu.au/economics/global_economy/tut8/Tutorial8.html

Tachibanaki, T. & Tomohiko, N. (2000) Economic effect of trade unions in Japan.

Ebrary [Online]. Available at: http//site.ebrary.com (Accessed 30 September 2011).