The global economic issue of emerging protectionism versus economic integration has intensely raised a heated debate of the potential return to protectionism. According to Gray (2017), the decline of mega-regional trade deals in the recent years in developed economies does not necessarily point to collapse of economic integration. Although bicycle theory about trade liberalization suggests economic integration will ultimately collapse unless it keeps moving forward, Gray (2017) claim this is wrong.
Regional integration, which represents cross-border flows among neighboring nations, has significantly increased. However, as shown by recent development, this trend has been brought to question. Anti-globalization is rapidly spreading, income inequality is on the rise and protectionism is growing.
With this trend, it is easier to expect a decline in economic integration. In this paper, I argue that this does not have to be so because the rising regional trade among the emerging markets (EM) would compensate the declining economic integration among developed economies.
Pros and Cons of Economic Integration
Economic integration and establishment of regional trade among different countries were among the major economic reforms put in place after World War II. This was adopted as an attempt to foster global integration and promote peace and unity among the nations. Integration of economic policies between different countries led to the removal or reduction of set quotas and tariffs imposed on imports. This implied that prices of goods and services have been lowered as consumers and distributors move their products freely across-borders (Abeyratne, 2016). Lowered import prices have benefited consumers as competition for market share intensifies between local and foreign companies. Therefore, free trade and economic integration have facilitated reduction of price mechanisms of different goods and services in the global markets.
Unlike trade protectionism, which protects local industries against the importation of cheap products, economic integration, and globalization, in the long run, may limit the growth of domestic firms. Aggressive market entry from foreign firms may create unhealthy competition that forces domestic industries to lower their prices in order to retain their market share (Ferrara, 2015). Ultimately cheap imports lead to potential decline and collapse of domestic industries if no measures are put in place to regulate the excessive importation of similar products.
Economic integration fosters free importation and exportation of good and services which act as an important measure of a nations balance of trade within a given period. Economists usually measure the relative strength of a countrys economy by calculating the difference between its exports and its imports. A country that imports more goods and services compared to what it exports to foreign markets records a trade deficit. However, a country that exports more goods and services compared to what it imports from foreign markets records trade surplus which favors its economic stability.
With free trade, countries would understand their potential balance of trade. Those with trade deficit would mount concerted measures to breach the gap by specializing in production areas that take advantage of both domestic and foreign markets (Kathuria & Nagpal, 2016). It provides a framework of how a country can increase its exports as a result of increased output and economies of scale. The expanded market increase productivity and efficiency of domestic firms that in the end result to an improvement of a nations balance of trade.
The major disadvantage of free trade is trade imbalance. Advanced economies such as the United States and China tend to benefit more by capturing opportunities to export to foreign markets especially the developing countries (Waal, 2015). Demand for their goods and services are higher because of the stable industrial base. For this reason, their products are relatively cheaper than domestic products in developing economies. Therefore, developing economies would experience increased trade deficit of goods traded.
Economic integration fosters exchange rate mechanism. It reduces international price deviations in the demand for both goods and equity. It is quite ironical for the current US administration to oppose free trade and instead advocate protectionism that ultimately is expected to weaken exchange rate. Though limiting imports may reduce financial flows outside the United States, this does not necessarily signal the collapse of economic integration. Financial flows expected to maintain relatively stable exchange rates is likely to increase as a result of Chinas aggressive program of One Belt, One Road that brings together sixty-five emerging markets (Das, 2016). This program will enhance financial and trade ties as well as support infrastructural development of 4.4 billion population.
Adopting protectionism implies that the US would experience a decline of goods traded internationally. Besides, it will experience increased exchange rates and large price movements that may lead to current account adjustment of four to five percent of GDP. This will complicate further current trade deficit in the US economy.
Economic integration increases labor mobility. International data on labor migration proves that employment opportunities increase with an increase in exports. Exporting industries will experience expansion from the domestic market to international markets. Because of free trade, local industries would generate more revenues that lead to the building of new industries in foreign countries. Efficient exporting industries will be able to compete effectively with small domestic firms which in the end will result in the movement of labor (Murgasova & International Monetary Fund, 2015). Cheap labor from developing nations will be preferred by firms operating in developed economies.
With free trade, job outsourcing by developed nations such as the US is made possible. Because of failure to embrace job diversification among its citizens, United States has experience shortage in science, engineering and high-tech workers. Therefore, economic integration has facilitated their acquisition of labor from foreign countries.
The disadvantage of labor mobility brought about by economic integration is a loss of skilled labor from the developing countries. Workers would migrate to advanced economies for better-paying jobs. This mobility may directly affect the economic growth of developing countries.
Massive labor mobility as witnessed in the UK cause infrastructure problems. According to immigration statistics, it is estimated that the UK has seen an increase in the population of five hundred thousand in the past year (World Bank Group, 2015). The rise in population has raised serious concerns about the possible strain on public services such as housing, health, and education.
Apart from affecting labor mobility, economic integration also influences inflation rate of a country. It has been proved that a rise of imports from lower-wage countries results in strong price effects. For instance, European producer prices decrease by about three and four percent when manufacturing growth of a lower-wage country rise by one percent above trend.
The European producer prices are impacted significantly with emerging economies such as Chinese exports. Particularly, findings show that when Chinese exporters gain one percent access to the European market, European producer prices decrease by about five percent. This demonstrates that exports and imports help curb any potential increase in prices of domestic products and hence it lowers inflation.
Pros and Cons of Protectionism
Protectionism, as advanced by the current US administration, is an economic practice intended to limit trade between countries, mostly through imposing set quotas and tariffs on all imported goods and services. To fast track this policy, involved countries may also introduce subsidies of domestic products.
Protectionism shield local economy from undue competition from foreign industries. It helps protect the domestic jobs by maintaining the competitiveness of local industries. Prices of commodities at the beginning are cheaper but in the long run, it is expected to rise (Masciandaro & Balakina, 2015). This economic practice is healthy for newer industries in their formative stage because it gives them room to grow.
On the other hand, its major disadvantage is increased prices of commodities due to lack of competition. Without entry of foreign products, domestic products become more expensive even if wages increase.
As opposed to free trade that is associated with enormous trade deficits, protectionism is the best remedy for excessive trade imbalance (McCann & McCloskey, 2015). Little is imported but more is exported generating in the process surplus trading.
Despite the beneficial gain of cutting down trade imbalance, protectionism makes it harder for a country to access foreign products. Good and services may become unavailable or much more expensive.
Protectionism can help shield mobility of cheaper labor to advance economies. For instance, US stand to benefit because cheaper labor from countries such as Mexico would be barred. In these countries, workers have poor health and safety conditions because of low wages. Protectionism policy gives rise to higher domestic jobs and wages. Usually because of free trade domestic industries outsourced jobs to foreign employees and in the process undercut wages.
Although protectionism lowers prices of products in the short-term its effect in the long-term however leads to increased products prices. Its benefits tend to be short-lived because it will take only a matter of time before other countries increase their tariffs to check unfair trading in the market (Johnson, 2015). As result of this several jobs will be lost, particularly those that rely on exports. Essentially, embracing protectionism means that as a country you have chosen to close your border to foreign products, hence other nations too will close theirs. Hence, in the long run, it will lead to significant in inflation.
Having looked at both the pros and cons of emerging protectionism versus economic integration, free trade and globalization it is apparent that protectionism, as supported by the current US administration, serves only short-term interests that eventually lead to increase in inflation and rise in product prices. On the other hand, economic integration leads to long-term benefits such as liberalized markets and decreased inflation rate.
Though the US has shown strong intent to adopt protectionism, the outlook of economic integration does not have to be necessarily gloomier in the foreseeable future. The rising free trade in the emerging markets is expected to compensate the decline of mega-regional trade deals in developing economies. The decline only serves to show the distribution of global supply chain is likely to change. This can only be achieved if the emerging markets do not backtrack on unilateral trade liberalization. Economic integration has been enhanced over the last thirty years around the world. Despite United State pulling out in some key interregional trade, there is sufficient evidence from January this year that indicate the international merchandise trade has been on the rise even at a faster pace which is mainly attributed to expansion of trade in the emerging markets.
Abeyratne, R. I. (2016). Competition and investment in air transport: Legal and economic issues.
Cham : Springer
Das, R. C. (2016). Handbook of research on global indicators of eco...
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