Free Research Papers on Pro NAFTA
Friedrich List believed that trade protection and a strong active role for the state was the best way to promote domestic industries. On the other hand, Adam Smith believed that free international markets were more advantageous than trade barriers. But which theorist was right? States uses different paradigms to interpret certain situation on the international scene. For the most part, states have used different paradigms in different periods of time. Most of these paradigms, more notably mercantilism and liberalism, can be associated with different theories and policies. Numerous studies have been conducted in order to determine whether or not certain paradigms work better than others or to determine whether or not certain theories and policies can benefit states better than others. Obviously every case and situation is specific to every country.
Liberalism and mercantilism are among the most popular paradigms in international relations. Both of these doctrines can be applied to international political economy. They can both be associated with certain theories, which in essence, define their course of action. Liberalism expects states to engage in free trade, while mercantilism and economic nationalism expect states to engage in protectionist measures. History has proven than almost every state on the planet has already employed one of these international economic theories.
The following paper will define the international economic theories of liberalism and mercantilism. This study will also define what these theories expect to happen, in other words, free trade with regards to liberalism and protectionism with regards to mercantilism. Furthermore, the paper will include two case studies, Canada and Mexico, and discuss the effects of these economic theories on these respective countries. The chosen timeline for these two case studies will be from the beginning of the 1980's until today. The paper will attempt to show and prove what theory, free trade or protectionism, is better applied in the real world, to each state in question. The thesis of the paper is: the practice of free trade is better for Canada, while the practice of protectionism is better for Mexico. This hypothesis will be supported by several arguments which prove both cases in point, in the timeframe of the 1980's until now.
LIBERALISM
Liberalism is one of the most important paradigms in international relations. In short, liberals believe in freedom, individual rights and free markets. Liberalism was adopted out of a reaction to mercantilism. Liberal theorists believe that the world is a positive sum game and that all parties can benefit out of a trade agreement. Liberalism can also be related to the international economy (Balaam & Veseth, 2005). It is more specifically in this respect, where the emphasis of this paper shall be concentrated on.
The liberal perspective on political economy can best be summarized by ``laissez-faire economy'' and open free markets. Several theorists, like Adam Smith, thought that liberal economies can best be driven by self-interest and competition. When competition is put in place, it prevents anyone from gaining the power to coerce someone else. According to liberals, people pursue their own self-interest, which then inadvertently contributes to the rise of wealth for the global economy. Liberal theorists relate this view of the economy onto the international scene (Balaam & Veseth, 2005).
International liberal theorists focus their study on the relationship between states, with regards to cooperation, competition and trade. Liberals view international trade as mutually advantageous for all the parties involved. They do not believe that trade must be driven by fierce competition for wealth and power. Liberals are under the impression that if a state can purchase a product for a cheaper price from another state, than they would be better off than if they had to produce it themselves at home at a more expensive rate. For the most part, liberals are opposed to tariffs and restrictions, which mercantilists use to control national power and wealth. David Ricardo, who was a renowned political economist in Britain, was a pioneer in free trade. He believed that states, which practiced trade in open markets, would become more efficient in the economy. Efficiency was a very important aspect of liberalism. Liberals believed that efficiency in the economy led to success for the individual and the international economy (Balaam & Veseth, 2005).
John Maynard Keyes, who was a great contributor to international political economy, developed a liberal perspective, which combines the actions of the state and market working together to improve the international economy. He developed a theory called the Keynesian Theory of Keynesian political economy. This theory became embedded in the Bretton Woods system of international political and economic trade and institutions. This particular system promoted a liberal international system with open markets and free trade (Balaam & Veseth, 2005).
The theory of international economic liberalism was a response to another international economic theory known as mercantilism. These two theories can sometimes be described as opposites, but yet in the international system several states have sometimes applied both theories to their foreign policies (Balaam & Veseth, 2005). The following section of the paper will describe mercantilism.
MERCANTILISM
The main objective of mercantilism is to maintain a nation's security in all of its forms. The state and the market play crucial roles, in order to sustain a states security vis-à-vis other states. Balaam and Veseth define mercantilism as ``a theoretical perspective that accounts for one of the basic compulsions of all nation-states to create wealth and power in order to preserve and protect their national security and independence'' (Balaam & Veseth, 2005, p.27). In other words, whenever there are international threats concerning security, whether it be military, economic or political, there will be traits of mercantilism present. The general consensus is that mercantilism is a theoretical perspective which concerns the practice of state policies and actions which are put in place in order to maintain a state's security and international identity in relation to the economy (Balaam & Veseth, 2005).
States must maintain their security through either peaceful or violent means. States came to realise that security was very costly and that they had to always provide armies and equipment in order to sustain that security. Wealth came to be regarded as one of the most important elements in keeping power and security. The main way that states used to increase their wealth was to promote exports and limit imports. States raced to become independent by acquiring this trade surplus. They often used state funds to produce goods for exports (Balaam & Veseth, 2005).
Mercantilism shapes the international system and states become very competitive with each other. They begin using several protectionist trade tactics in order increase their wealth. Economic nationalism is a form of mercantilism which focused on the internal development of a state's national economy. Strong state action is the dominant theme of economic nationalism. Alexander Hamilton and Friedrich List were among the most famous supporters of economic nationalism. They believed that protectionism had to be used to protect a country's infant industries (Balaam & Veseth, 2005).
Mercantilism evolved over the years to adapt to more current international affairs. The result was neomercantilism, which promoted gentler protectionist practices, like import tariffs and quotas. These measures were used to create economic advantages for national industries or to counter the economic advantages created by other states. Neomercantilism became a popular practice after the creation of such international organisations such as the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO). These organisations arose at a time, were the general consensus was that free trade and open markets would prevent the mercantilist-based economic wars of the past (Balaam & Veseth, 2005).
FREE TRADE AND PROTECTIONISM
Liberalism and mercantilism both suggest certain behaviour, in terms of the policies which are related to them. They both assumed certain actions which state have taken throughout the years. Liberalism suggests that free trade should take place in the international world, while mercantilism suggests that protectionism is better for the economy of a state. Sometimes these two policies are advocated by two states at the same time, however most state either practiced free trade or protectionism. In addition, the use of these policies and the degree to which they are practiced has varied throughout history. The more recent trend is the promotion of free trade which has become quite popular after the creation of the Free Trade Agreement (FTA), the North American Free Trade Agreement (NAFTA) and the European Union Association Agreement (AA). These associations were more or less established in the 1980s and continue on today (except for the FTA which became NAFTA) (Balaam & Veseth, 2005).
``Free trade or free trade area is a group of nations that agree to eliminate tariff barriers for trade among themselves, but which retains the right of individual nations to set their own tariffs for trade with other states outside the free trade area'' (Balaam & Veseth, 2005, p. 501). Economic liberals believe that free trade allocates resources in a more efficient way, creates greater incomes and higher productivity for all of the partners involved. Free trade is tied in with the liberal notion of freedom, where states trade amongst themselves in a free environment with no restrictions. In our contemporary world, scholars suggest that the international system is already made up of numerous free trade blocs and that other blocs will arise (Balaam & Veseth, 2005). In short, economic liberalism assumes the practice of free trade.
On the other hand, mercantilists expect that protectionism is the correct policy to follow on the international scene. Protectionism is the belief that trade restrictions, through different means, can be advantageous and beneficial for a state's domestic industries and producers. Protectionist advocators believe that protectionism is crucial if a state wants to protect its national industries and independence. They also encourage protectionism over free trade in order to support the use of their national products in foreign markets. The goal is to lower the sales price of a state's commodity on a foreign market. Mercantilists see protectionism as a way to increase their wealth and power in relation to other states on the international market (Balaam & Veseth, 2005).
There are numerous protectionist measures which can be used to protect a state's market and industries. For example, tariffs occur when a tax is placed on an imported good in order to raise that goods price and make it more expensive than local products. States can also apply import and export quotas which limit the quantity of an item that states can import or export. Nontariff barriers (NTBs) are measures which can be used to limit imports. NTBs are government health and safety standards which make it difficult for products to be sold in another state's market. The objective is to raise the price of imported goods. All of these protectionist measures can be associated with neomercantilism which is a more recent form of mercantilism. Neomercantilism is a softer form which attempts to stick within the realm of international trade. The GATT recognises most neomercantilist protectionist measures (Balaam & Veseth, 2005).