Does protectionism or economic freedom make us more or less competitive?


Today we all wonder if protectionism or economic freedom makes us more or less competitive.

So, in order to have some answers, we will focus on the two great countries that move and lead the world economy; taking into account its performance especially during the 2018-2019 period.

What is the competitiveness of a country?

When we refer to the competitiveness of a country, we think about how each country organizes its set of political, economic and social institutions, to obtain a higher level of productivity.

  • On the one hand, increasing the level of productivity means that in the production process we are spending fewer scarce resources in relation to the goods and services that we are producing, that is, we are becoming efficient in the use of scarce resources.
  • Then what happens if we increase our level of productivity, consequently the population's standard of living improves, because we can count on a greater degree of material well-being because there is an increase in the generation of wealth for people.
  • Consequently, if people are richer, they can meet more needs because they have more resources available to meet not only basic needs, but secondary needs as well. People in general live better.

The level of competitiveness in 2019

In effect, the latest global competitiveness report prepared by the World Economic Forum takes into account 141 countries, which in general terms make up 99% of the global gross domestic product (GDP).

This study takes into account 103 indicators that are grouped into 12 categories, which are:

  • Institutional Security
  • Infrastructure
  • Adoption of Communication and Information Technologies
  • Macroeconomic Stability
  • Health
  • Job Skills
  • Goods Market
  • Working market
  • Finance system
  • Size of the market
  • Dynamism and Ease of doing new business
  • And innovative capacity

Finally, these twelve categories are summarized in 3 fundamental elements: basic requirements, efficiency enhancers, and innovation and sophistication factors.

However, the most important surprise of these latest data is that the United States, which had been occupying the first position in this report, now occupies the second position with these results:

Now, as we realize, the United States was overtaken by the Asian country of Singapore; what does this have to do with protectionism and economic freedom.

  • On the one hand, the United States, which had been characterized as one of the freest countries in the world, has now been applying a series of protections to industry and national production.
  • Since then, the trade war has had a fundamental impact on investment, because it is no longer one of the most attractive countries to invest, precisely because of the uncertainty caused by the mercantilist measures that have characterized the government of Donald Trump. This situation has diminished the competitive superiority of the United States.
  • On the other hand, Singapore has been characterized in recent years, for being an economy increasingly open to international trade, with a network of very solid and secure institutions, likewise its level of infrastructure becomes an ideal model for businesses and investments are highly competitive.
  • In the same way, this high level of competitiveness also affects the high level of development in the educational, health, political and environmental fields.

Competitiveness and wealth

Likewise, by improving competitiveness, the ability to generate wealth also increases, in this case we can also refer to the data obtained from the latest report prepared by the Swiss bank Credit Suisse published this Monday, October 21, which indicates that for the first Once China surpasses the United States.

That is, China is now in the first place and according to this report it has 10% of the richest people in the world; This indicates that China has an estimated 100 million rich people, compared to the 99 million people of the United States.

This data gives a privileged position to the Asian country, which practically becomes the financial engine of the world economy.

Apart from, the fundamental reason why China has surpassed the United States, is specifically due to the fact that China increasingly expands its levels of openness to the world economy, making it stop being an emerging economy, to achieve a high level of growth economic.

Consequently, the measures applied have sought to achieve a greater degree of economic freedom, which has correspondingly produced a consistent decline in poverty reduction in China, as we can see in the following graph taken from the Information Office of the State Council / National Bureau of Statistics China.

It is clearly evident that the level of poverty has decreased considerably and this implies that the standard of living of the population also improves.

Protectionism or economic freedom?

As we can see, the data is clear and evident that the greater the intention and degree of protection applied by governments in their attempt to achieve competitive superiority, the greater the damage; since economic protectionism is a very harmful measure for the economy of the country that applies them; but it also has a negative impact on the world economy.

Who is affected by protectionism?

1. End consumers

Above all, it affects the final consumer, because they must pay the over-price of protection, as in the case of tariffs or high prices caused by import quotas or quotas, which by making the product scarce, increases its price.

Also, if the regulations are very strong, they could cause monopoly and oligopoly problems; situations that particularly harm consumers.

2. Companies

On the other hand, protected companies become less competitive, since with protectionist measures they can compete, but they spend more resources or diseconomize scarce resources that they use inefficiently in their production processes.

Of course, companies could be affected if they require imported raw material to produce, and if these inputs have tariffs, it makes their production costs more expensive.

3. Governments

The governments themselves are affected, for example, if they impose prohibitive tariffs the country already imports less and this causes tax revenues to be reduced.

Similarly, if consumers reduce their level of consumption, the government also reduces the income generated by taxes.

4. National and international trade

Finally, by affecting national trade, this will impact the commercial relationship with other countries in the world. If a country places barriers and obstacles to trade to another country with which it is related, that country also applies retaliatory measures and the process of production and product exchange becomes increasingly costly.

In conclusion, we can realize that economic freedom and particularly free trade allows countries to achieve a higher degree of economic growth and development, which results in a better standard of living and well-being of society in general.

Unfortunately we are living in a time in which the application of all kinds of protections has been returned, especially in international trade; and the results are overwhelming in the impact caused to the economies of the specific countries that have applied them, but in the same way they have affected the performance of the global economy.

However, we cannot fail to indicate that not all is good in free trade. Free trade and economic freedom bring many good things, but it can also generate inequalities, lack of protection and unwanted negative effects. That is, on average the life of society improves, but averages are not always a true reflection of all economic reality at all levels.

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