What are the costs and benefits of free-trade?
Year 11 Economics
The founding fathers of Australia’s Federation were divided on the issue of protectionism and free-trade. Since Federation, Australia is still divided between protectionism and free-trade, with both sides raising arguments for both policies. Some are adamant in protecting domestic economy with strong protectionism policies. Others believe in removing barriers of trade to ensure consumers have an optimum choice. However, on a global stage, every country has a different view on the argument, with majority of the countries tending to utilise aspects Free-Trade policy. Supporting both the domestic economy while opening up to the diversity which international trade offers.
Protectionism is defined as “assistance for domestic firms to compete against foreign competition” (Webster, 2000) and with the fundamentals of giving domestic firms “an artificial advantage” (Averis, 2013). Such barriers exist in the form of tariffs, quotas, or subsidies, and protect domestic producers from international competition and redirect, rather than create trade flows (Shah, 2013). Since the 1970’s tariffs have been slowly dismantled in Australia’s liberalisation reforms. Between 1970 to 2001, the average tariff has fallen from 30% to 5% (Jackson, 2010). Federal Government initiatives, also like the ‘Button plan’ that reduced the tariffs on the car industry have significantly contributed to this (McCrann, 2014).
Free-trade occurs when there are “no artificial barriers put in place by governments to restrict the flow of goods and services between trading nations” (Edge, 2010). Existing obstacles to trade are generally removed through the participations of nations in international trade agreements, such as bilateral free-trade agreements (FTA’s) between two countries, World Trade Organisation, and the Asia Pacific Economic Co-operation (APEC) (Averis, 2013). Recently there has been resurgence in free-trade agreements between Australia and other countries. With Australia this year adding to its seven existing FTA’s by signing two FTA’s with South Korea and Japan (Abbott, 2014).
There is a trend toward the strengths of free-trade outweighing those of protectionism. One of the most fundamental benefits of free-trade arises from the principle of comparative advantage. Comparative advantage is when two countries have removed all barriers of trade between them, so they can specialise in the goods and services that they produce relatively cheaper (Webster, 2000). They can then trade with each other and sell the product at a lower cost, due to lower opportunity cost. This will result in an increased standard of living, as products are cheaper and therefore consumers can afford to purchase more (Webster, 2000).
The removal of barriers can also benefit our domestic economy, and it also has a global impact. Free-trade will generally result in an increased standard of living, for developed and developing countries. Allowing developing countries to increase their wealth, which may lead to greater global stability, and reduce the risk of “turmoil and war” (Smith, n.d.). Protectionism policies that have been opposed sometimes may cause friction between countries. As an example, the ASEAN has in the past disapproved Australia’s protective barriers into Asian countries and Australia has criticised the US subsidies given to its wheat farmers (Webster, 2000).
Another argument in favour of free-trade is that it will lower the prices of imports and will therefore benefit domestic consumers offering a wider range of choice. Such free-trade will also allow exporters to be more competitive in international markets as other countries lower tariffs in response, which can increase domestic firms profits, through an increase in export earnings. BHP Billiton, one of Australia’s mining superpower, is an example of a major domestic firm that has benefited from increased export earnings as