Throughout history, there has been a progressive adoption of market economies within countries. One economical school of thought – liberalism – states that if we let markets work by themselves, we’ll eventually achieve efficiency and economic growth. This thought passes over to international relations too, defending that countries should trade between themselves, let it be goods, services, capital or labour. By letting countries interact between themselves, they will be able to grow by exporting the goods they are most efficient at producing and importing the ones that they aren’t as efficient. When looking at the data, we in fact see that, throughout the years, there has been a growth of exported goods in percentage of world GDP, alongside the exponential growth of world GDP and movement of the financial assets between countries. So, one might think that liberalism is right and that, in fact, the more open the economy is and the less intervention there is, the better, right?
Well, although countries are progressively more interdependent, there has also been some room for government intervention. In fact, there are multiple reasons why governments should intervene in their economy by limiting international trades. For instance, national security is one of them. The United States should not export a good that they are efficient at producing if it might end up putting them at risk, as is the case with military jets. Another reason is to protect their own population such as when South Korea stopped meat imports back in 2009 when there was the swine flu. Even if there’s no need for government intervention due to the previous reasons, Paul Krugman states in his award winning New Trade Theory that, if a firm is the first one entering the global market, it will have a “first mover advantage”, meaning that, by deciding prices and quantities, it can impose barriers on future firms that want to enter the same market, so, there is room for government intervention in the form of subsidies and other kinds of help to the firm.
All in all, although there are clear advantages in liberal trade policies, keep in mind that there might exist room for government intervention in increasing efficiency in market failures such as the ones referred.
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Student of the Bachelor’s Degree in Economics
Nova School of Business and Economics