Note on Trade Protectionism and Free Trade

  • Note
  • Things to remember

TRADE PROTECTIONISM

In order to prevent domination by foreign goods, to safeguard in domestic industries and to attain micro economics stability, government may impose various types of restriction to control the inflow of foreign goods in the domestic market. Such majors are called trade protectionism. It can be classified into two following types:

  • Tariff Barrier

Tariff barriers refer to imposing a high rate of import tax in the foreign goods. This increased the price of foreign goods and they become more expensivecompared to domestic product. This discourages the foreign good from imports.

  • Non-Tariff Barrier

Besides imposing a tariff,government may adopt another mechanism like a quota, exchange rate policy, export subsidies to a domestic product, lengthy documentation process, etc. to discourage inflow of foreign goods and to promote domestic products. These mechanism are called non-tariff barrier.

ADVANTAGES OFTRADE PROTECTIONISM

The following are the main arguments for trade protection:

  1. Protection of infant industries
    Infant industries are those industries that involve a new technology in the production. Thus, their production is very high and quantitative. Trade protection policy is adopted by a country to protect such infant industries.

  2. Protection of sick industries
    We can find a number of sick industries of the primary sector in a country. We must protect such industries avoiding their negative effect such as medicine industries.

  3. Protect strategic industries
    Strategic industries such as energy, water, steel, etc. are too essential for the development of a nation. So , the protection of such industries are very necessary. Thus, the protectionism is to protect such industries.

  4. Employment opportunities
    Trade protection policy may be adopted to protect nation industries for generating employment opportunities in the nation in the short run but such policy has not been found practicable in a long run.

  5. To save environment degradation
    Trade protection policy may be adopted to protect the environment such from the air pollution due to imports of a vehicle .

  6. Protect nonrenewable resources
    Trade protection policy is adopted to protect nonrenewable resources like coal, petroleum products, etc.

DISADVANTAGES OFTRADE PROTECTIONISM

  1. Possibility
    When the government protects few domestic industries, they may create monopoly power in a domestic market. So, the consumers may have to compromise with low quality and high quality.

  2. Fear of Dependency
    Once the government provides various facilities to domestic production business, the industrialist becomes dependent on the government support. So, they may go to protest if the government attempts to withdraw its support at any moment.

  3. Income Inequality
    In most of the underdeveloped countries, factors are run by the class which has high level of income. Giving protection to these factories means to make richer people wealthier while the poor people may not get anything. This increases the gap between rich and poor. Hence, the rich gets richer and poor gets poorer.

  4. Loss in consumers welfare
    Protectionism discourages the inflow of foreign goods in the market. Hence, there is limited choice for the consumers. Due to absences of competition, the quality of goods and prices may not remain in a favour of general consumers.

  5. Dispute among the countries
    Protectionism creates misunderstanding among the nations. If one country uses protection mechanism, the other country is also expected to adopt similar policies. Hence, it creates conflict among the countries.

  6. Effects in Employment Opportunities
    The absence of competition in this policy does not enhance the firm's efficiency and entrepreneurs may not take initiatives for the growth of their business. this ultimately affects employment opportunities in the long run.

FREE TRADE

Simply, free trade is a policy of freedom in trade. Free trade is the process where the goods and services are traded freely without any restriction. It enables lower price for consumers. In a case of free trade, all the tariff and non-tariff barriers are completely removed to allow competition.

According to Adam Smith, "The term free trade has been used denoted system of commercial policy which draws not a distinction between domestic and foreign commodities and thus which neither imposes an additional burden on the later nor grants any special favour to the former."

ADVANTAGES OF FREE TRADE

  1. Benefits of Comparative Advantages

    Free trade enables countries to specialise in those goods where they have a comparative advantage. There can be an increase in economic welfare by specialising in goods where countries have a lower opportunity.

  2. Resource Allocation
    Trade improves global efficiency in resource allocation. A glass of water may be of little value to someone living near the river but is priceless to a person crossing the Sahara Desert. Trade delivers goods and services to those who value them most.

  3. Make use of Surplus Raw Materials
    Free trade utilizes the surplus raw materials of a country. Likewise, Qatar is very rich in reserves of oil but without trade, there would be not much benefit in having so much oil.

  4. Economies of Scale
    The country can benefit from economies scale if they can specialize their certain goods. The benefits of economies of scale will ultimately lead to lower prices for consumers and greater efficiency for exporting firms.

  5. Benefit to Consumer
    Free trade is beneficial for the consumer as they can get the best services at lower price and save the remaining or enhance their living.

  6. Increased competition
    With more trade, there will be for sure competition among the domestic firms. Therefore there will be more incentives to decrease the costs and increase efficiency.

DISADVANTAGES OF FREE TRADE

  1. Case of Infant Industries
    For newly emerging industries, free trade creates a lot of problem as these industries don't have a competitor in relation to price and quality.

  2. Risk of Dumping
    The developed countries may do the business of second-hand goods and obsolete products in underdeveloped countries. This can create harmful effects in the under developed countries.

  3. Effects on Natural Securities
    The foreign business enterprises can do illegal trading, terrorist activities, drug dealing etc in the name of doing business. This can affect the image of the country and the national securities.

  4. Effects in Domestic Industrialization
    Underdeveloped countries don't have the high production capacity to compete with foreign goods. So, they become highly depended on imported goods, which ultimately affects industrialization in the adomestic area.

  5. Exhaustion of Natural resources
    Under developing countries are mostly relying on primary products and natural resources for their export. So, when they involve in free trade, there is a highrisk of depletion of natural resources.

Bibliography

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.

Economics. (n.d.). Retrieved 06 27, 2016, from Benefits of free trade: http://www.economicshelp.org/trade/benefits_free_trade/

  • Argument for trade protection
  1. For protecting infant industries
  2. For protecting sick industries
  3. Protect strategic industries
  4. Protect Non renewable resources
  5. Creating job opportunities
  6. To save environment degradation
  7. Limit extreme specialization 
  • Disadvantages of trade protectionism
  1. Creation of monopoly
  2. Increases in inequality
  3. Reduce public revenue
  4. Loss to consumers
  5. Decrease in competitive capacity
  •  Advantages of Free Trade
  1. Benefits of Comparative Advantages
  2. Economies of Scale
  3. Make use of Surplus Raw Materials
  4. Benefit to Consumer
  5. High factor income
  6. Technical Improvement
  • Disadvantages of Free Trade
  1. Dependency on imports
  2. Unequal Competition
  3. Encourage dumping
  4. Harmful products
  5. Exhaustion of Natural resources
.

Very Short Questions

0%

DISCUSSIONS ABOUT THIS NOTE

No discussion on this note yet. Be first to comment on this note