The European Union between Free Trade and Protectionism

Bachelor Thesis , 2018 , 39 Pages , Grade: 1.3

Economics - International Economic Relations

This thesis deals with the European Union and its tension between free trade on the one hand and protectionism on the other. A closer look at the EU reveals an inconsistency in its policies. Thus, in its domestic policy, the EU represents a strongly free-trade-oriented attitude by standing for a single market without any restrictions. Externally, however, the EU tends to take a protectionist stance in some sectors, such as agricultural policy.

In order to be able to deal with this topic more exactly, all bases must be understood as for example terms and theories. For this purpose, the concept of free trade and protectionism will be introduced in detail. Then, in chapter two, the term "economic justification of free trade" is defined in more detail.

Table of contents

1. Introduction

2. Economic justification of free trade
2.1 Definition and origin of free trade
2.2 Free trade as an institutionalized fundamental value
2.3 Reasons for free trade
2.4 Summary

3. Economic justification of protectionism
3.1 Definition and origin of protectionism
3.2 Forms and instruments of protectionism
3.3 Reasons for protectionism
3.4 Summary

4. The European Union as the engine of free trade – A historic development of free trade using the example of the internal market
4.1. The European Single Market
4.1.1 Definition
4.1.2. The European Economic Area (EEA) and its fundamental freedoms
4.1.3. Economic and Monetary Union (EMU)
4.2. Historical development of the European single market

5. The European Union as an engine of protectionism – A historic development of protectionism using the example of the Common Agricultural Policy (CAP)
5.1. The Common Agricultural Policy (CAP) - Definition and Tasks
5.2. Objectives, financing and development of the Common Agricultural Policy (CAP)
5.3. The external protection of the Common Agricultural Policy

6. Summary

Bibliography

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1. Introduction

The 20th and 21st centuries are characterized above all by globalization, industrialization, the ever-increasing networking of transport and communication channels, the establishment of cross-border capital movements, the liberalization of the markets and the ever-increasing global free trade. In the 21st century, free trade and its effects on the people have been strongly felt. In the everyday life of every individual, free trade has become a matter of course. Mobile devices from the USA or South Korea, food from Africa or Latin America or cars from Japan, France or the USA are consumed. This list could go on many more pages, which makes the importance of free trade and the international economic relations associated with it all the more clearer. The figures also show the enormous importance of global free trade. In the last 50 years alone, the total volume of world trade in goods increased from 59 billion US dollars in 1948 to 11873 billion US dollars in 2006, which means an increase of 200 times (Kruber / Mees / Meyer 2008, p. 1; Yüksel 1995, p. 30f.).

Despite the enormous importance of free trade, it also has some negative aspects to it. For example, in the case of a globally free market, jobs can be relocated abroad in order to save costs or to lower certain standards in environmental and social policy in order to increase the attractiveness of one's own location compared to the competition (Sill 2014, n. p.).

Free trade is also a recurring theme in the media. Only a short while ago, for example, the "Transatlantic Trade and Investment Partnership", or TTIP for short, put free trade in a bad light. TTIP was characterized above all by mass protests against the free trade agreement throughout the EU. For example, critics criticize the lower consumer protection of the USA, which would thus also be transferred to the EU, for example in the field of genetic engineering. However, the lower environmental standards of the U.S. would also be transferred to the EU. For example, methods such as fracking[1] would also be permitted in the EU (Sill 2014, n. p.).

[1] Fracking is a method that makes it possible to extract gas and oil deposits that are bound in rock layers. For this purpose, a mixture of water, sand and chemical additives is pressed into the rock layer under high pressure. This method is strongly criticized by environmentalists, as the chemical additives can contaminate the groundwater (Heinritzi 2013, n. p.).

The topic of protectionism has also become more strongly represented in the media, especially recently. One of the most conspicuous supporters of protectionism at the moment is undoubtedly Donald Trump, who has caused a sensation all over the world through slogans such as e.g. "We make America great again" or "America first". Trump already announced in 2016 that he would renegotiate trade agreements and, if necessary, terminate them, but also increase tariffs. Just recently, Trump threatened the EU with new, higher tariffs on steel and aluminum (Zeit 2018, n. p.; Nienhaus / Schieritz 2016, p. 2).

Although Trump currently stands out for his protectionist plans and is under criticism from all sides, he and thus the U.S. is not the only economic actor who stands up for protectionist measures. Each country has a protectionist stance in certain sectors. The reasons for this will be worked out in the course of this paper. The EU also stands out with protectionist instruments such as agricultural policy (CAP). It should be noted that, despite the extreme increase in world trade in recent decades, opposing trends have also increased. Regionalization, for example, has been increasing due to the formation of economic blocs and free trade zones since the 1990s. Especially since the last few decades, non-tariff trade barriers have been increasing despite the decrease in tariffs, which means that industrialized countries in particular want to isolate themselves from cheaper competition. In addition, there is the increase in newly introduced import restrictions, which are increasing more and more in relation to the abolished import restrictions (Kronberger 2007, p. 1f.; Lernhelfer 2010, n. p.; Yüksel 1995, p. 26; Schantz 2017, p. 16f.).

This paper deals with the European Union and its tension between free trade on the one hand and protectionism on the other. If we take a closer look at the EU, we can see an inconsistency in its policy. For example, the EU has a strong free-trade attitude to domestic policy, in that it stands for a single market without any restrictions. Externally, the EU, in turn, has a protectionist attitude in some sectors, such as agricultural policy. To be able to deal more closely with this topic, it is first necessary to understand all the basics, such as terms and theories. To this end, this paper presents in detail the concept of free trade and protectionism. Thus, first in chapter two "Economic Justification of Free Trade", the term free trade is defined in more detail.

Subsequently, its origins are worked out, which dates back to the 18th / 19th century. Subsequently, the insti tutions representing global free trade and their functions are presented. As a result, possible reasons for a free trade-oriented policy are explained in more detail. Finally, the most important contents of this chapter are summarized in a short summary. Chapter three, "Economic Justifications for Protectionism", is about getting to know and better understand protectionism. Here, too, the term protectionism is first defined in more detail. It then presents the origins of protectionism, based on Jean-Baptiste Colbert, a French statesman who developed mercantilism in the 17th century. This is followed by a description of the forms of protectionism, which are roughly divided into two categories: non-tariff and tariff barriers to trade. Subsequently, the third chapter presents possible reasons for protectionist measures. Also at the end of this chapter, the most important contents are recorded in a short summary.

In the fourth chapter, the internal market addresses the EU's inwardly free trade-oriented attitude. First of all, the term 'internal market' is defined, and its importance is illustrated by a number of facts. This will be followed by a presentation of the European Economic Area and the European Economic and Monetary Union, which together form the European Single Market. Finally, it looks at the development of Europe from the Second World War to the creation of the internal market.

In the fifth chapter, the EU's agricultural policy, which is jointly protectionist in an outward-looking manner, is the counterpart of the fourth chapter. First, the term 'agricultural policy' and the common agricultural policy (CAP) are defined. The tasks of the CAP are also briefly presented. This will be followed by a series of developments in the CAP, which, like the development of the internal market, can be traced back to the Treaty of Rome. It then deals with the objectives and financing of the CAP. Finally, the instruments for the EU's external protection in the agricultural sector will be developed.

The summary briefly summarizes the entire content of this paper. Finally, it mentions the tension between protectionism and free trade between the EU, with regard to the CAP and the common internal market.

2. Economic justification of free trade

The following chapter deals in detail with the facets of free trade. The aim is, after this chapter, to have a comprehensive understanding of the concept of free trade, to know its origins and to have become acquainted with the institutions that represent it. This is intended to create a basis for the following chapters.

2.1 Definition and origin of free trade

Trade existed, already in ancient times. Even then, trade between great powers such as Carthage and Rome flourished in the Mediterranean. The term "free trade" can be traced back to the 14th century, because already there the first free trade agreements, which assured a mutual free trade between states, were concluded (von Schanz 1881, p. 283ff.; Yüksel 1995, p. 13).

As can be seen, trade is not only a phenomenon of the last centuries, but dates back thousands of years. This work deals with the subject of free trade, the importance of which was greatly increased, especially by economists in the 18th and 19th centuries. Adam Smith and David Ricardo were among the most important authors of free trade theory. With works like "An inquiry into the Nature and Causes" by Adam Smith and "On the Principles of Political Economy and Taxation" by David Ricardo, these authors wrote important writings that played an important role in the development of free trade theory.

But before the origins of free trade are analyzed in more detail, the term free trade must first be defined.

Free trade is the principle of liberalism, according to which the prosperity of all countries is greatest when state restrictions on international trade are removed. According to the basic idea of liberalism, every barrier coming from outside limits the natural course of the economy. Only completely barrier-free trade and competition would lead to an optimal division of labor between the individual countries. Accordingly, free trade stands for the free export and import of goods and services between different countries (Adam 2017, n. p.; BpB 2016a, n. p.).

Free means here the renunciation of any trade restrictions, such as tariffs, non-tariff barriers and foreign exchange controls, that could make trade between countries more difficult. Free trade also stands for the free movement of capital across national borders. Accordingly, companies can freely invest in other countries, set up production facilities or buy and sell securities. To this end, the concept of free trade refers to the unhindered mobility of labor across national borders. In practice, these ideals of free trade are agreed in free trade agreements (Adam 2017, n. p.; BpB 2016a, n. p.).

Now that it has become clear what free trade means, we can now go into more detail about the theories of Smith and Ricardo.

Adam Smith and David Ricardo are among the fathers of capitalist liberalism. With works such as "An Inquiry into the Nature and Causes of the Wealth of Nations" by Adam Smith and "On the Principles of Political Economy and Taxation" by David Ricardo, they shaped liberalism as it is known today. Adam Smith described free trade as the prerequisite for the prosperity of the individual and society. David Ricardo, who a few decades later took up Smith's theory and developed it further, also described free trade without any restrictions as a prerequisite for a prosperous society. In his specially developed model of comparative cost advantage, Ricardo demonstrated that the prosperity of two countries increases through the specialization in goods with relative cost advantages (Kruber, Klaus-Peter / Mees, Anna Lena / Meyer Christian 2008, n. p.; Krugmann / Obstfeld 2009, p. 57ff.; Weiler 1996, p. 23ff.).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: (Weiler 1996, p. 26): Concept of comparative cost advantage

The following example illustrates Ricardo's model. Ricardo assumes a simple numerical example between England and Portugal. In this example, Portugal has a comparative cost advantage over England in wine production, since Portugal can produce one unit of wine instead of one unit of cloth, and England can produce only 2/3 units of wine (Weiler 1996, p. 26f.).

On the other hand, England has a comparative cost advantage over Portugal in cloth production, since England can produce 3/2 units of cloth instead of one unit of wine and Portugal can produce only one unit (see Fig. 1) (Weiler 1996, p. 26f.).

This is where Ricardo comes in. With the help of a production shift between Portugal and England, according to Ricardo, an efficiency gain can be achieved. For example, Portugal produces two units of wine more than in the initial situation PA and England two units of wine less than in the initial situation EA, cloth production in Portugal is reduced by two units. However, cloth production in England would increase by three units. Overall, the same amount of wine and one unit of cloth would be produced more than in the initial situation. This shows the importance of trade, which would bring benefits to both sides (see Fig. 1) (Weiler 1996, p. 26f.).

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: (Weiler 1996, p. 27): Comparative cost advantage in the classic foreign trade model

If Portugal specializes completely in wine production and England in cloth production, Portugal can exchange the excess amount of wine for the excess amount of cloth in England. Thus, Portugal would reach the consumption point PC and England the consumption point EC. In the trade balance, the price ratio must be just such that Portugal's wine exports EXP are equal to England's wine imports IME. Likewise, the cloth exports of England EXE must be equal to the cloth imports of Portugal IMP. Free trade would lead to an increased efficiency of the labor factor and thus to a higher overall production (see Fig. 2) (Weiler 1996, p. 27f.).

Hence the importance of free trade. Restrictions by any institutions would only disrupt this balanced cycle and artificially alter the prices of goods , as a result, both countries would no longer benefit to the maximum from their specialization (Kruber, Klaus-Peter / Mees, Anna Lena / Meyer Christian 2008, n. p.; Krugmann / Obstfeld 2009, p. 57ff.; Weiler 1996, p.23ff.).

In conclusion, the traditional foreign trade theory of Ricardo and Smith is based on a number of assumptions. There must be a similar economic structure, a level playing field, equality between economic partners, no barriers to trade and complete competition if free trade, as defined by Ricardo and Smith, is to be possible at all. In reality, all these factors are often not given, which is why the traditional theory of foreign trade is hardly applicable in today's world (Weiler 1996, p. 30ff.; Yüksel 2001, p. 15ff.).

2.2 Free trade as an institutionalized fundamental value

After the definition of free trade and its origins were presented in the last intermediate chapter, the following chapter describes today's representatives of free trade in more detail. These organizations base their ideals and goals on the free trade theories developed by Smith and Ricardo. They form an essential part of today's world economy and trade, as they organize world trade and the world economy. Among the most powerful representatives of free trade are the World Bank, the International Monetary Fund (IMF) and the World Trade Organization (WTO). These organizations specialize above all in ordering world trade, regulating it, promoting economic cooperation, and working towards the dismantling of trade barriers. This serves to give more space to economic action (Münch 2011, p. 63ff.; Müller / Kornmeier 2001, p. 122ff.).

The World Bank is a development organization that provides loans to carry out development projects to promote economic growth and eradicate poverty. It was founded in July 1944 at the Monetary and Financial Conference of the founding members of the United Nations in Bretton Woods (USA) together with the International Monetary Fund (BMZ undated a, n. p.; Münch 2011, p. 65f.).

One of the world bank's main tasks is to provide financial instruments for long-term development and construction projects in the real economy, to combat poverty in the world, and to promote and build businesses in developing countries. The World Bank consists of five organizations: the International Bank for Reconstruction and Development (IBRD), the International Development Organization (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for the Settlement of Investment Disputes (ICSID). The Headquarters of the World Bank is in Washington. With over 1800 projects, the World Bank operates in almost every area, such as the granting of loans, the promotion of school education or the reconstruction of areas destroyed by earthquakes (BMZ undated a, n. p.; Münch 2011, p. 65f.).

The International Monetary Fund (IMF), as recently mentioned, was founded together with the World Bank in July 1944 in Breton Woods (USA). It includes 188 countries, including the USA, Germany, France, Great Britain and China. The tasks of the International Monetary Fund include promoting international cooperation in matters of monetary policy, facilitating the spread of sustainable growth in international trade, stabilizing monetary relations, creating a system for multilateral payments between members and reducing the duration and extent of imbalances in the balance of payments of members (BMZ undated, n. p.; Münch 2011, p. 67f.).

The World Trade Organization (WTO) was formed after seven years of negotiations as a result of the 8th round of multilateral trade negotiations, also known as the "Uruguay Round", in 1994 in Marrakesh, Morocco. It arose from the General Agreement on Tariffs and Trade (GATT). The World Trade Organization currently has 164 members and a further 21 countries are in the process of joining. This means that over 80% of the countries on earth belong to this organization. In fact, the WTO has four fundamental principles. These are the principle of reciprocity, which obliges every WTO member to adhere to certain framework conditions, such as a certain tariff on products, the principle of liberalization of international trade, which is one of the most central, or the principle of most-favored-nation treatment, which obliges all members of the WTO to enjoy all the advantages they grant to a trading partner in trade in goods, to grant unconditionally to all WTO members (Münch 2011, p. 69ff.; BMWI undated a, n. p.; BMWI undated b, n. p.; Yüksel 2001, p.30ff.).

The principle of transparency, which provides for the rules and restrictions on foreign trade to be kept public and for changes to be communicated. One of the WTO's main tasks is to monitor WTO agreements[2] and the national trade policies of WTO members, dispute resolution in the event of violation of WTO agreements and the formation of forums for negotiations between member states on the removal of trade barriers (Münch 2011, p. 69ff.; BMWI undated a, n. p.; BMWI undated b, n. p.; Yüksel 2001, p.30ff.).

[2] In principle, the WTO is based on three main agreements and a few ancillary agreements. The main agreements include the GATS, which is committed to the liberalization of the services sector. The TRIPS, which deals with the intellectual property rights of authors and the protection of trade secrets, and the GATT, which has taken on the task of easing international trade and the process of resolving conflicts (BMWI undated c, n. p.; Dieckheuer 2001, p. 225ff.; Yüksel 2001, p.62ff.).

2.3 Reasons for free trade

Since the last chapter presents the organizations that represent free trade today, this chapter deals with the reasons that speak in favor of free trade. As Smith and Ricardo explained centuries ago, free trade offers some advantages for states. These advantages have already been discussed in Chapter 2.1, which is why they will not be repeated here.

Free trade is one of the most important economic instruments in the 21st century. But why has the importance of international free trade increased so much, especially in recent centuries? In order to be able to understand this increase, the reasons for free trade are presented below.

Free trade brings growth, jobs and prosperity. Currently, 31 million jobs in the EU alone are already dependent on exports, accounting for almost one seventh of the total EU jobs. If we look at the forecasts for the next few years, this figure will increase a great deal, which will lead to more jobs. The OECD estimates that a 10% increase in trade leads to an increase in per capita income of about 4%, which means an increase in prosperity per capita (Schantz 2017, p. 8f.; Weiler 1996, pp. 31ff.; Schmüser 1998, p. 54ff.; EU Commission 2018, n. p.).

In addition, there is the diversity, quality and lower prices of the products provided to the consumer by free trade. As a result, consumers can afford more products and thus also generate more wealth (Schantz 2017, p. 8f.; Weiler 1996, pp. 31ff.; Schmüser 1998, p. 54ff.; EU Commission 2018, n. p.).

Free trade ensures progress. In order for a country to remain competitive and innovative in the long term, it must continue to develop. The increasingly open markets and the growing number of new market participants promote the exchange of ideas and products and increase entrepreneurial competition. Here, too, consumers benefit from free trade, as innovative products reach them more quickly (Schantz 2017, p. 10f.; Weiler 1996, p. 31ff.; Dieckheuer 2001, p. 48ff.).

Free trade brings international security and stability. Free trade strengthens the international division of labor, which means that trading partners are becoming increasingly interdependent. This dependence forces the trading partners to cooperate more, which leads to more stability and peace at international level. One reason for this is that the non-cooperation between the trading partners becomes too risky (Schantz 2017, p. 12f.).

Free trade ensures specialization and efficiency. The ever-increasing competition forces companies to produce more efficiently and cheaply, which leads to inefficient producers being forced out of the market. Due to the pressure to always produce at the most cost-effective, the products are relocated to regions where they are produced most effectively. This ensures that these regions specialize more in this good (Broll 2001, p. 8ff.).

2.4 Summary

To sum up, free trade is the principle of liberalism. This principle states that the prosperity of all countries is greatest when state restrictions on international trade are removed. Free trade is not a phenomenon of the 20th or 21st century, its origins date back to the 18th century (Adam 2017, n. p.; BpB 2016a, n. p.).

David Ricardo already demonstrated in his relative cost-advantage model that free trade without any state restrictions between nations leads to the prosperity of a society and its individuals. Even today, powerful organizations such as the World Bank, the IMF, and the WTO represent the free trade theory as Ricardo described it at the time. These organizations aim to break down trade barriers, promote free trade and organize world trade (Weiler 1996, p. 26ff.; Münch 2011, p. 65ff.).

Free trade brings many advantages, such as jobs growth, prosperity, progress, security, and peace, from which trading partners can benefit. These advantages, in particular, ensure that most countries in the world aspire to free trade.

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• College: University of Duisburg-Essen (Social Economics)
• Grade: 1.3
• Author: Anes Ridha (Author)
• Publication Year: 2018
• Pages: 39
• Catalog Number: V1168384
• ISBN (PDF): 9783346574343
• Language: English
• Tags: European Union, free trade