Understanding Free Trade, Protectionism, and Balance of Payments

International Trade: Free Trade vs. Protectionism

Free Trade

Free trade is the doctrine that defends commercial transactions between two or more countries conducted without impediments. To boost international trade, governments use these tools to promote exports:

• Official bodies: They offer advice to exporters. In Spain, this is done by the Institute of Foreign Trade and Chambers of Commerce.
• Financial assistance: This is provided in the form of export loans.
• Grants: These support businesses.

Protectionism

Protectionism is an economic policy that supports the establishment of barriers to free trade among countries to safeguard national production. Protectionist measures aim to protect national industry and agriculture, which can be adversely affected by competition from foreign entities. It also aims at job creation through the process of substituting imports with goods manufactured in the home country.

Protectionist Measures

1. Tariffs: These are taxes levied on goods coming from outside when they cross the borders of a country. Tariffs make foreign products more expensive, reducing their demand within the country.
2. Quotas (Contingents): This involves fixing a quota or maximum amount of a specific imported good.
3. Non-Tariff Barriers: These are restrictions on international trade that can take many forms, such as complex customs formalities and costly delays in the movement of goods.

Balance of Payments

The balance of payments is a systematic registration of trade that occurs between residents of a country and the rest of the world during a period of time.

Components of the Balance of Payments

1. Current Account: It reflects the movement of goods and services between a state and the rest of the world, as well as funds that move from one country to another without compensation, and exchanges between countries in labor income and capital.
   • Trade Balance: This takes the value of all goods bought and sold.
   • Balance of Services: This records the value of all services provided to residents of other countries and received from them.
   • Balance of Income: This includes income from residents employed in a foreign country.
   • Balance of Transfers: This records income and payments that occur without any compensation in return.
2. Balance on Capital Account
3. Financial Account Balance: Investments made by non-residents. Assets in Spain (Bank of Spain).