This document goes over free trade areas and evaluates protectionist polices using chains of analysis. Protectionist measures in response to currency manipulation is also critically examined.
What is a free trade area?
a. A free trade area occurs when a group of countries agree to eliminate trade barriers on all goods
and services, but member countries are permitted to set their own level of tariffs against non-
member countries. For example, extract 1 mentions “the North American Free Trade Agreement
(NAFTA). NAFTA lowers trade barriers between the USA, Canada, and Mexico.”
Evaluate protectionist policies:
b. Protectionism is the use of economic policies to restrict international trade, mainly to reduce the
quantity of imports entering a country.
One reason for implementing protectionist policies may be to protect geriatric industries. A
geriatric industry is an industry that is in decline. These industries are usually in decline as a result
of not being unable to compete with international firms. For example, line 7 of extract 1 states
“The president argued that decades of free-trade policies were responsible for the collapse of
much of the USA’s manufacturing industry.” Free-trade policies allow international firms to
maintain competitiveness as they do not have to incur additional costs as a result of trade barriers.
However, the use of protectionism would limit the amount of competition domestic firms face.
Thus, increasing competitiveness. This may allow firms to see increases in revenue, which would
then aid the recovery of domestic firms. Therefore, the use of protectionism would be justified. On
the contrary, most geriatric firms are unlikely to see a gain in comparative advantage that was once
attained. In this case, the use of protectionist policies may not be justified as it would not
necessarily help advance the economy.
An additional argument for protectionism could be to protect domestic industries and
employment. As a nation imports more goods, this may lead to a decline in the competitiveness of
domestic industries. Due to increased competition, international firms may have cheaper prices
than competing domestic firms, which leads to a decrease in local demand. As demand falls, this
causes firms to reduce production levels. Thus, causing a decline in the level of employment. For
example, line 13 of extract one discusses that there are disadvantages to globalisation such as
“bringing cheap consumer goods into the country, causing unemployment and lower wages.” By
imposing protectionist policies this would lower the competitiveness of international firms, as their
costs of production would increase. This would lead to higher prices and consequently cause the
demand for local goods to increase. Therefore, protecting domestic industries and maintaining
employment levels. However, despite maintaining or increasing employment levels by means of
protectionism, domestic consumers may suffer from higher prices than what they would have had
to pay if they purchased international goods. Thus, negatively affecting consumers as consumer
surplus would fall.
Lastly, a reason for protectionism may be to prevent dumping. Dumping is the sale of goods and
services below their cost of production by international firms in domestic markets. There are
multiple reasons why international firms choose to dump goods and services in domestic markets.
A cause for concern may be when a firm uses dumping with the sole intention of driving domestic
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