Protectionism vs.
Free Trade Debate: A Multilateral Trade
Agreement Analysis
Department of Business Administration, University of the
People
BUS 1104-01 - AY2025-T1
Class Instructor: Dr. Babandi Gumel
October 16, 2024
USMCA
Introduction
The USMCA, effective since 2020, is a modernized trade agreement
that fosters economic collaboration and reduces barriers among the
United States, Mexico, and Canada. This analysis delves into the
balance between protectionism and free trade within USMCA,
assessing how countries within this trade area utilize economic
advantages and address industry protection to sustain and enhance
economic prosperity.
1. Concepts of Absolute and Comparative Advantage in
International Trade
In international trade, absolute advantage exists when a country
can produce a good more efficiently than its trade partners, while
comparative advantage reflects a country’s ability to produce a
particular good at a lower opportunity cost than others. These
concepts are foundational in trade theories that encourage
specialization and efficiency. For instance, Canada has an absolute
advantage in lumber production due to its vast forest resources,
while Mexico’s comparative advantage in manufacturing arises from
lower labor costs, enabling it to produce goods like automobiles
efficiently within USMCA (Amiti et al., 2019).
2. Application of Absolute and Comparative Advantages
within USMCA
USMCA countries effectively leverage absolute and comparative
advantages to optimize trade benefits. For instance, Canada
capitalizes on its absolute advantage in natural resources,
particularly in the production and export of energy products like
crude oil and natural gas, where it leads among USMCA partners.
The U.S., on the other hand, utilizes its comparative advantage in
technology and capital-intensive industries to export machinery,
chemicals, and pharmaceuticals. Mexico’s labor-intensive
manufacturing sector highlights its comparative advantage, allowing
it to specialize in automotive and electronics exports at competitive
prices, largely driven by lower wage costs relative to the U.S. and
Canada (IMF, 2023; Ke, 2023).
3. Protectionist Measures within USMCA
Despite free trade aspirations, the USMCA incorporates specific
protectionist elements intended to safeguard domestic industries
and labor markets. For example, under USMCA’s automotive rules of
origin, 75% of automobile content must be made within the USMCA
region, and a significant portion of production must occur in plants
with higher wage rates. These measures protect North American
automotive jobs from foreign competition, responding to concerns
about economic security and job preservation. Additionally,
protectionist tariffs remain on some agricultural products to
maintain self-sufficiency and shield farmers from volatile global
markets, a stance reinforced by the IMF’s findings that trade
restrictions can support local industries during economic disruptions
(Finance & Development, 2023; Ke, 2023).
4. Advocating Open Markets and Reduced Import
Restrictions within USMCA
Proponents of open markets within USMCA emphasize the economic
efficiency and global specialization achieved through reduced
import restrictions. By enabling goods to flow freely, the agreement
fosters competitive pricing and encourages industries to specialize,
enhancing productivity across borders. For example, under USMCA,
Mexico’s open-market approach allows it to import U.S. agricultural
products efficiently, while the U.S. imports Mexico’s cost-effective
manufactured goods. This mutual dependency has fostered
economic growth and resilience in the face of external shocks like
the 2018 tariffs, as analyzed by Amiti et al. (2019). The IMF stresses
that open markets ultimately promote prosperity, and within
USMCA, this approach allows for a stable economic integration that
benefits consumers and boosts competitive advantage in global
trade (IMF, 2023; Ke, 2023).
Conclusion
The USMCA exemplifies the ongoing balance between protectionism
and free trade, applying both principles to support diverse industries
within North America. While protectionist policies under the USMCA
aim to preserve jobs and national security, the agreement’s core
emphasis on free trade fosters regional economic specialization and
efficiency. This dual approach, aligned with the comparative
advantages of each member nation, enables sustainable economic
growth and strengthens the region’s global economic position amid
shifting trade dynamics.
References
1- Growing Threats to Global Trade. (2023, June 1). IMF.
2- Ke, R. (2023, September 22). Free Trade vs. Protectionism:
Exploring the Rationale Behind Trade Barriers. Advances in
Economics and Management Research, 7(1), 563.
3- Amiti, M., Redding, S. J., & Weinstein, D. E. (2019, November
1).The Impact of the 2018 Tariffs on Prices and Welfare. Journal of
Economic Perspectives, 33(4), 187–210.
