Free Trade or Protectionism: Which Is Best For Globalized Age?

Since the 1990s, when the world began to interconnect financially, one of the most enduring debates in international trade theory, the discussion over free trade against trade protectionism, has intensified. On the one hand, those who stand on the side of liberalizing trade barriers argue that doing so strengthens competition in world markets and substantially increases income levels. On the other hand, others point out that protectionist policies boost and benefit the local economy and maintain a favorable trade balance.

The reality is that historically, both approaches have been adopted by different countries across different times, sometimes even combining them together to bolster the economy, which allows us to have a better picture of the benefits that each approach can provide. 

Trade protectionism is a type of economic policy in which the state intervenes in the country's foreign trade through restrictions, limitations or tariffs on goods or services from abroad, in order to curtail imports and thus support domestic companies. 

Free trade, in contrast, is the complete opposite because in this approach,  the state intervenes to a lesser extent, and it allows trade to be regulated solely by the laws of supply and demand. As such, imports are loosely controlled by tariffs or other quotas, allowing countries to strengthen commercial and diplomatic ties among them. 

The great powers of the 90’s widely implemented protectionist measures, but from 1991 onwards, free trade became the official doctrine of the globalized world, so that today, most countries exchange goods and services in a more open fashion

Protectionism and Free Trade in the Globalized Age

There is still a large number of countries around the world that implements trade restrictive measures. Japan is one of the most prominent in applying such policies and, thanks to the protection of its growing industries, managed to increase per capita income by 9.9% between 1970 and 2000, according to the World Bank. In the following years, these 

protectionist policies allowed Japan to become more competitive compared to other countries and thus consolidate its position as a strategic nation for international trade.

Latin America's protectionist approach is worth highlighting, as it is a region that has long been an advocate of protectionist policies as a tool to foster the development of its domestic industries. Brazil, having built its modern economy around such measures, managed to position itself as an emerging country; however, it failed to meet its own economic expectations, leading it to the brink of recession.

As for free trade, this is the most widely used approach around the world, although only a few countries have benefited greatly from this economic model. Such is the case of Germany and the Netherlands, which thanks to the fact that their industries, especially the automotive industry, have managed to position themselves on a highly competitive level around the world, they both benefit greatly from having an open market, as it allows them to sell a greater quantity of products overseas. For this reason, it is common for them to record trade surpluses every year. Meaning their exports are greater than their imports.

Although both trade policy approaches seem to provide an array of benefits to the countries that implement them, the reality is that they also add significant disadvantages. On the one hand, Clemens Fuest, president of the ifo Institute for Economic Research, a Munich-based research institution, claims that protectionist policies harm the economy, as they make products more expensive because they reduce supply. 

Ha Joon-Chang, an economist with Cambridge University, argues that most of the countries that today benefit from free trade actually achieved their prosperity thanks to protectionist policies applied in the 1970s. The main reason for this is that free trade sets an environment in which emerging countries cannot become more productive, since it is impossible to compete with the industries of the most powerful nations.

The question remains: Which of the two economic policy approaches is the most effective in this new globalized era?

Hybrid Model: A Success Story and the Challenges Ahead

Given the above, the fundamental problem for  the world economy becomes evident: with both protectionism and free trade, developing countries are at a clear disadvantage, and there is a greater productivity gap between these and the developed world. It is therefore necessary to rethink the ideas proposed by both policies and to put on the table that the solution to these problems could be, in fact, to merge them. 

The hybrid model has been used on numerous occasions throughout history to strengthen the economy of countries, especially in developing countries. As an example, the People's Republic of China stands out, which in the 1970s was an impoverished nation with a Gross Domestic Product (GDP) of US$150 billion for its more than 800 million inhabitants.

In 1978, Deng Xiaoping sought to transform China's economy through a new formula that broke with everything established by his predecessors: for the first time since 1949, China opened up to foreign investment and liberalized the private sector, which contributed to increasing its productive capacity and achieving the highest economic growth in history in a very short period of time.

However, it also maintained protectionist practices through tariff and non-tariff measures established to protect the most important sectors of the Chinese economy, which eventually led to greater competitiveness and allowed China to consolidate as the "factory of the world." For this reason, Deng's proposal should be taken as a success story for the implementation of a hybrid policy and as a baseline for the growth of the world economy.

Despite this, this Asian country still faces a series of challenges that in the future will represent the key hurdles to overcome for the economies that follow the Chinese example of hybrid policies. First, wealth inequality in China has increased quite rapidly after the transition to a market economy: a study by the Organization for Economic Co-operation and Development (OECD), reveals that it takes seven generations for someone born in the poorest 10% in China to approach the median income.

In addition to the frenetic population growth, this situation triggers other types of problems, such as low university enrollment among young people from rural areas or rising real estate prices that prevent lower- and middle-class Chinese from accessing fair housing.

This is not just a situation unique to China, but one of the main challenges of the globalized age, regardless of the economic model. Solving these challenges is essential for the world economy to grow; therefore, we can only hope that measures to overcome these challenges get implemented in the very near future.