Protectionism

When speaking of protectionism we usually refer to the economic policy of restraining trade between nations. This is mostly done through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed in order to discourage imports. When we speak to criticizers of protectionism, they’re very likely to define is at anti-globalization as it contrasts with free trade.



As we all know, the Presidential elections in the US are a very deeply discussed issue nowadays, as the Americans are basically left to choose, either Mc Cain, fighting for globalization or Obama, promoting protectionism.
We’ll focus on Mr. Obama’s view, considering what sort of measures he might take in order to protect the US economy from foreign trade.

Nowadays, the US remains the greatest economic power worldwide, but it is facing strong competition from overseas as well as internal difficulties. When the US economy was built up, they focused on venturing abroad in order to promote trade and set up special production sites in other countries. Whatsoever, the US has reached so far, that their local industry starts to be eroded.

Furthermore the US achieved something far more important than anything else: the Dollar became the world’s currency. This means that all the main decisions on the amount of cash in circulation are made within national borders. This gives the US an exorbitant privilege as it guarantees a maximum degree of national independence. Still, by becoming the world’s currency, existing in huge amounts the dollar also became the most threatened money, as it can be bought to collapse by external forces.

However the US is far from being in a good state nowadays, private, public and corporate debt far exceeds any known dimensions, millions of households are constantly borrowing huge amounts of money so that in the end the future they’re looking forward to, doesn’t seem to be the one they expected.

We do believe in Change -

But is it going to affect the US and the whole world in a positive way?

If Mr. Obama gets elected president of the United States, he’s believed to set up stricter regulations, in order to protect his country and promote employment. I believe that to start with he’s going to set up price-control objectives in order to protect the US-Dollar, which is steadily losing in value.
As for this, he might set some specific restrictions as well on exports as on imports. The export restrictions may include raising costs of smuggling prevention, the importance of keeping domestic prices down by increasing domestic supply or also to shift foreign production and sales. Considering the restrictions that Obama’s administration might put on imports, they may include the prevention of having exports priced below national prices and finding a way of having foreign producers lower their prices.
I believe that by “protecting America from foreign trade”, Obama believes he found a way of “saving the middle-class” by restricting imports in order to promote the production of local consumption goods and services that formerly were imported.

As we all know, Obama keeps on praising that he wants to “save the middle-class”, but I truly believe that by enforcing the protectionist level of the US, he’s not going to reach his objective. Obviously he will create new jobs and promote employment, but is this truly Americas main aim??
The US is facing such an incredible amount of debts nowadays, they’re not likely to pay it back any time soon, so is it a good idea to set up new facilities (as they outsourced many branches of production) and pay a higher amount of labour-cost? Is it actually promoting the American economy?
Well I don’t think so. To the contrary, by setting up restrictions, the EU, China and many other developed countries won’t hesitate and follow him, and the whole system of globalization will be facing a breakdown. And the US, who’s obviously going to be “in charge”, won’t be able to do anything about it as the value of their money is decreasing while their amount of debts is increasing.

To end up with I believe that the main problem nowadays is that the world is suchlike interlinked, that his willingness of promoting protectionism came to late. All the countries depend on each other to a certain limit and if one of them starts proving “selfishness”, I believe, it’ll end up in a complete economic desaster.

NAFTA vs. EU - Why is the EU more successful?

Both the NAFTA and the EU are perfect examples for prescriptive trade theories, which means that they are concerned with government interference in the free movement of goods and services.

The North American Agreement Free Trade Agreement, NAFTA, was created by the governments of the US, Canada and Mexico. Basically it is a trilateral trade bloc, which first came into effect on January 1, 1994.
Thanks to the NAFTA, all non-tariff barriers to agricultural trade between the US and Mexico were eliminated, and in addition to that many other tariffs were eliminated. Since than, even more have been phased out, which allowed for an orderly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008.
Since entering into effect in 1989, the agricultural provisions of the US – Canada Free Trade Agreement, they simply got incorporated into the NAFTA in 1994.
Anyhow Mexico and Canada reached a separate bilateral NAFTA agreement on market access for agricultural products, most of the tariffs have been eliminated but still a few remain.




The European Union, EU is an economic and political union, which was established by the Treaty of Maastricht in 1993. It counts twenty-seven member states, mainly located in Europe.
The main power of the EU is that its members have been able to create a single market through a standardized systems of laws which apply in all member states, guaranteeing the freedom of movement of people, goods, services and capital. Due to its common Trade policy and many other agreements the EU is nowadays the biggest free trade block in the world.

But was does the EU have, the NAFTA doesn’t?

Basically, in order to find an answer, we have to concentrate ourselves on the different theories of trade.

Obviously, in both the NAFTA and the EU, we live in the principle of comparative advantage, defined by David Ricardo, which believes that in order to promote productivity it is essential to specialize in what your best at. Even though richer countries are better at everything, by leaving some work to developing countries they become even more successful, and both countries are highly benefiting.
Basically a country is said to have comparative advantage in the production of a good if it’s able to produce that good with a lower opportunity cost than all the other countries.

Above we have an example of comparative advantage, based on Germany and Italy.

However, the theory of comparative advantage is not the reason why the EU is more successful than the NAFTA, in order to answer this we have to refer to a Swedish economist, Steffan Linder, who developed the Country Similarity Theory. It basically states that the more similar countries are (mostly measured per capita income), the greater is the chance of forming a strong trade connection.


And here we got the answer, the EU consists of twenty-seven different members, which are all more or less on the same economic basis or have at least some countries they’re equal to, which, when relating to the country similarity theory, makes it easy to build up a strong trade connection.
On the other hand, the NAFTA is compiled of Canada, the US and Mexico; while it is obvious that the US have the strongest economy, Canada also proves strong economic performances. However, Mexico is still developing and as such “drags” down the possible efficiency, the NAFTA could have if Mexico was as strong as the others.

GLOBAL ECONOMICS - Blog 1 Globalisation

When speaking of globalization we refer to the phenomenon we’re living in today, to a society, which works together on a social, cultural, economic and political basis.

Globalization became popular after the industrial revolution, in the early 1990’s, its concepts basically refer to a strategic economic planning, which promotes integration, growth and boosts free trade. Promoting free trade might have been the most important issue this process had to deal with, as by eliminating all the barriers between countries, we finally were given the opportunity to build up a flow of goods and services, which was unhindered by government-imposed restrictions.
The drop of these barriers were very cost effective on one hand but also promoted great INTERDEPENDENCE between different countries. Nowadays, the world’s economy wouldn’t survive without free trade.

With globalization constantly growing technology became more and more important in order to reduce costs (as we saw in the example of free trade), be more effective and be able to push the phenomenon to the point we’ve reached today – Globalization controlling the world.


But was Globalization profitable to the whole world? Did it promote solely well? Who benefited from it? Who didn’t?

When we refer to economic theories of comparative advantage, we can clearly see that free trade suggests that all the countries involved in the trade are somehow benefiting. This is due to the fact as in general it leads to lower prices, lower unemployment rates, higher standards of living and higher outputs.

This obviously is true to a certain point, but still the difference lays on how much they profit and the gap, which grows between the winners and the losers.

If we have a look at the graph shown below, we can clearly see that the US has a main impact on the International Trade. But if we had the same graph showing us the importance Africa has on the International Trade Exposure, we would barely see the line climbing above null.





As such we can tell that the winners of Globalization clearly are the US, Europe and the BRIC’s, which somehow made their way through and outsourced the whole process to a maximum and have nowadays a very important place in the international economy.



In contradiction to that Africa and South America are the losers of the whole process, as when globalization started to overcome the world at once, those countries weren’t developed enough to compete with the others and were always trying to keep up with them. Still, this didn’t work out as while the others kept on growing more year by year, getting more and more interdependent, they were left besides and haven’t had the possibility to interact.

If we take an example of trade between developed and developing countries: poorer countries mainly export agricultural goods and it is very hard for them to compete with stronger countries which are more likely to subsidize their own farmers as they are willing to save their national markets.
However this leads us to the fact that as the poorer farmers cannot compete, they have no other way than to sell their crops at extremely low price, which are far inferior than what the market is paying.


Anyhow the main issue nowadays basically is this incredible gap, which build itself up during the last decade. If globalization is keeping up steadily growing that way neither Africa nor South America are very likely to reach the level of the benefiting countries any time soon.