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The Impact of Trade Policy on Unemployment Report

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Updated: May 11th, 2022

International Trade

The study conducted by Dutt, Mitra, and Ranjan, is based on the pre-existing relationship between trade and unemployment. According to Dutt, Mitra, and Ranjan, there is a strong link between trade and unemployment, and, therefore, adaptations of various trade policies are bound to impact unemployment indirectly. Depending on the motivation behind their implementation, a country may opt to adopt various trade policies, to align with its economic goals and objectives. Most of these policies are usually aimed at ensuring that the country either retains or improves its position in the international trade arena. One such set of policies is protectionist policies. Dutt, Mitra, and Ranjan describe protectionist policies as all those policies that are aimed at enhancing the position of a country in the international trade arena, while at the same time, limiting the negative impacts of international trade on the local scene. From this description, it follows then that protectionist policies are those policies that are meant to protect the local sectors from any negative effects, which might come about as a result of the uncontrolled introduction of foreign commodities. There exists a strong link between protectionist measures as a trade policy and unemployment. These two aspects have a negative correlation, whereby an increase in one aspect results in a corresponding decrease in the other aspect. Dutt, Mitra, and Ranjan assert that unemployment is one of the crucial economic issues, but be that as it may, most economists have failed to address this issue adequately in most of their economic analyses. The relationship between unemployment and protectionist measures is just one among many other relations, which can be drawn between these two aspects.

Most analysis usually fails to factor in the aspect of unemployment. Instead, most rely on full employment. Full employment, in economic terms, refers to that state of employment, in which the country does not experience any unemployment attributed to changes in the economic cycles. At this level, full employment required that the existing unemployment is equal to the natural rate of unemployment. This, therefore, implies that at full employment, most of the issues associated with unemployment are absent. Therefore, analyses that are based on full employment are under the assumption that unemployment and its consequent effects are at best regarded to be minimal. Dutt, Mitra, and Ranjan point out that there have been remarkably few studies seeking to correlate trade and unemployment. The study is based on the two aspects of trade and unemployment. It seeks to draw a relationship between trade and unemployment. According to the study findings, trade has a negative correlation with unemployment.

The main issue addressed by Dutt, Mitra, and Ranjan in their research is the impact of trade-related policies on unemployment. According to Dutt, Mitra, and Ranjan, there is a direct correlation between trade policies and unemployment. A trade policy that encourages openness, as far as the undertaking of trade practices is concerned, has been shown to negatively impact unemployment. A liberal economy that decides to open its doors to international trade, for instance, will result in some of the economy’s sectors that lack a competitive advantage, being adversely affected by such a move. This is because firms belonging in such a sector do not have the same capabilities to produce the same quality of goods and services, at the same productions cost as their foreign counterparts. Consequently, such a move will result in goods and services from foreign countries with a competitive advantage, as far as the production of these goods and services are concerned, finding their way into the country. The entry of such goods or services is bound to affect local firms operating in the same industry. Because goods from foreign countries come from firms that have a competitive advantage, as far as their production is concerned, such commodities will be significantly cheaper as compared to those produced locally. Because of competitive forces, products originating from foreign countries will outperform those from local firms. This will undoubtedly impact the performance of local firms. The resultant effect will be the closure of underperforming firms in the local market or significant downsizing of the same. In turn, this will result in increased unemployment because most people will end up losing their jobs due to decreased closure or downsizing of firms.

Data and protection

The research conducted by Dutt, Mitra, and Ranjan was undertaken to establish the relationship co-existing between policy issues and overall unemployment. The research sought to investigate the impact of various trade policy measures on unemployment. The study analyses the impact of trade on unemployment for the period between 1990 and 2000. In carrying out the analyses, the study applied the use of the unemployment rate as the dependent variable, and this analysis was carried out in 90 countries. One of the specific trade policy measures that were emphasized in the study was protectionist measures, including measures such as tariffs, quotas, non-automatic licensing, antidumping, duties, and export taxes. These are among some of the measures that most countries have put in place to facilitate control of their trading practices. They seek to protect a country against the impact of uncontrolled international trade practices that if left unchecked, might negatively impact the economy of the country.

The research recognizes that each country has its own set of controls, as far as the protection of employees and their rights is concerned. Various labor laws are seeking to protect employees from exploitation from employers, and these controls are necessary for the analysis of the relationship between trade and unemployment. Some of these laws include employment laws that provide a legal framework when it comes to hiring and dismissal of employees and industrial action laws that govern how employees can engage in collective bargaining. Collectively, these sets of controls are usually aimed at streamlining the activities within the labor market, and in doing so, they also indirectly seek to address the issue of unemployment. For instance, labor laws governing the hiring and dismissal of employees seek to prevent employers from firing employees at will, and this seeks to deal with the issue of unemployment.

Another objective of the research was to determine the correlation between unemployment and the degree of protection. This objective entailed analyzing the extent to which a country seeks to protect its local market and the relationship between such extent and unemployment. Dutt, Mitra, and Ranjan note that there is a direct relationship between the degree of protection and unemployment. The degree of protection directly determines a country’s ‘openness’ to international trade and, consequently, this degree, just like protection itself, has a direct relationship with unemployment. The report already established a negative correlation between protection and unemployment. This, therefore, implies that unemployment decreases with an increase in protection. It then follows that there is a negative correlation between unemployment with the degree of protection, in that such a correlation when related to the degree of protection, implies that unemployment decreases with an increase in the degree of protection.

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