Notes, Exercises, Videos, Tests and Things to Remember on Trade Protectionism and Free Trade
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Things to remember
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 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.
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:
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.
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.
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.
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.
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 .
Protect nonrenewable resources Trade protection policy is adopted to protect nonrenewable resources like coal, petroleum products, etc.
DISADVANTAGES OFTRADE PROTECTIONISM
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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
For protecting infant industries
For protecting sick industries
Protect strategic industries
Protect Non renewable resources
Creating job opportunities
To save environment degradation
Limit extreme specialization
Disadvantages of trade protectionism
Creation of monopoly
Increases in inequality
Reduce public revenue
Loss to consumers
Decrease in competitive capacity
Advantages of Free Trade
Benefits of Comparative Advantages
Economies of Scale
Make use of Surplus Raw Materials
Benefit to Consumer
High factor income
Disadvantages of Free Trade
Dependency on imports
Exhaustion of Natural resources
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