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Free Trade Is A

Free trade involves countries removing restrictions on imports and exports between each other. However, countries still practice trade protectionism by putting up barriers to imports to promote certain policy goals like protecting domestic industries, jobs, and strategic resources. While protectionism has costs, governments argue it can help safeguard infant and declining industries, correct trade imbalances, and generate revenue through tariffs. Overall, there are economic and political motivations for governments to limit free trade through protectionist policies in certain circumstances.

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Shivansh Tandon
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59 views4 pages

Free Trade Is A

Free trade involves countries removing restrictions on imports and exports between each other. However, countries still practice trade protectionism by putting up barriers to imports to promote certain policy goals like protecting domestic industries, jobs, and strategic resources. While protectionism has costs, governments argue it can help safeguard infant and declining industries, correct trade imbalances, and generate revenue through tariffs. Overall, there are economic and political motivations for governments to limit free trade through protectionist policies in certain circumstances.

Uploaded by

Shivansh Tandon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Free trade is a free market policy followed by some international markets in which countries'

governments do not restrict imports from, or exports to, other countries. In government, free
trade is predominately advocated by political parties that hold right-wing economic positions,
while economically left-wing political parties generally support protectionism.

The buying and selling of goods, without limits on the amount of goods that
one country can sell to another, and without special taxes on the goods bought from
a foreign country: a free-trade agreement

Trade protectionism

Trade protection is the deliberate attempt to limit imports or promote exports by putting up
barriers to trade. Despite the arguments in favour of free trade and increasing trade openness,
protectionism is still widely practiced.

The motives for protection

The main arguments for protection are:

Protect sunrise industries

Barriers to trade can be used to protect sunrise industries, also known as infant industries, such
as those involving new technologies. This gives new firms the chance to develop, grow, and
become globally competitive.

Protection of domestic industries may allow they to develop a comparative advantage. For
example, domestic firms may expand when protected from competition and benefit from
economies of scale. As firms grow they may invest in real and human capital and develop new
capabilities and skills. Once these skills and capabilities are developed there is less need for trade
protection, and barriers may be eventually removed.
Protect sunset industries

At the other end of scale are sunset industries, also known as declining industries, which might
need some support to enable them to decline slowly, and avoid some of the negative effects of
such decline. For the UK, each generation throws up its own declining industries, such as ship
building in the 1950s, car production in the 1970s, and steel production in the 1990s.

Protect strategic industries

Barriers may also be erected to protect strategic industries, such as energy, water, steel,
armaments, and food. The implicit aim of the EUs Common Agricultural Policy is to create food
security for Europe by protecting its agricultural sector.

Protect non-renewable resources

Non-renewable resources, including oil, are regarded as a special case where the normal rules of
free trade are often abandoned. For countries aiming to rely on oil exports lasting into the long
term, such as the oil-rich Middle Eastern economies, limiting output in the short term through
production quotas is one method employed to conserve resources.

Deter unfair competition

Barriers may be erected to deter unfair competition, such as dumping by foreign firms at prices
below cost.

Save jobs

Protecting an industry may, in the short run, protect jobs, though in the long run it is unlikely that
jobs can be protected indefinitely.

Help the environment

Some countries may protect themselves from trade to help limit damage to their
environment, such as that arising from CO2 emissions caused by increased production and
transportation.
Limit over-specialisation

Many economists point to the dangers of over-specialisation, which might occur as a result of
taking the theory of comparative advantage to its extreme. Retaining some self-sufficiency is
seen as a sensible economic strategy given the risks of global downturns, and an over-reliance on
international trade.

In addition to the economic arguments for protection, some protection may be for political
reasons.

For methods of protection, see tariffs and quotas

Arguments in favour of protectionism

So, why do some governments still protect trade? The main reasons include:

 To safeguard domestic employment - as protectionist polices reduce import penetration.


In terms of the identity AD = C + I + G + (X-M), the lower is M, the greater will be
aggregate demand and thus the higher the level of domestic output and employment.
 To correct balance of payments disequilibrium - as demand for imports is dampened
and exports promoted. This makes the domestic output appear to be more competitive.
 To prevent labour exploitation in developing economies - this is really a moral
argument as it rests on making imports more accurately reflect their true cost of
production. However, it might also reduce imports from some of the poorest economies
in the world.
 To prevent dumping - which is where economies sell goods in overseas markets at a
price below the cost of production. Domestic consumers pay more than those buying
overseas. Such low prices are part of a policy to destroy rivals in export markets.
 To safeguard infant industries - as shifts in comparative advantages arise, so some
countries become able to enter new markets. Their fledgling industry needs some
protection from the power of already established competitors.
 To enable a developing country to diversify - this is similar to the infant industries
argument. Many developing countries are heavily dependent on exports of primary
commodities. This can leave them very exposed to changes in international commodity
prices. If they want to diversify and develop new export revenue streams, they may need
to protect these new industries from full exposure to international competition for a
while.
 Source of government revenue - where protectionism takes the form of a tariff, apart
from reducing demand for imports via the impact of a higher price, this will also raise
revenue for the government, like any other tax. The revenue raising function will be most
successful where the demand for imports is price inelastic.
 Strategic arguments - a particular product or industry might be of strategic importance
to a country, e.g. agriculture or coal, and protectionism may be justified on the grounds
that it is keeping alive an industry which plays a vital part in the economy, perhaps
because of social, political or military reasons.

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