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Lecture 34

Lecture 34

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Published by: praneix on Aug 11, 2009
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LESSON – 34Non Tariff Trade Barriers and New ProtectionismLearning outcomes
After studying this unit, you should be able to:
Define Free Trade
Know Non tariff Trade Barriers and Protectionism
Arguments for free trade and protectionism
Know the demerits of protectionism
Identify the fall and rise of protectionism
Free Trade Versus Protection
Free trade refers to the trade that is free from all artificial barriers to trade like tariffs,quantitative restrictions, exchange controls, etc. Protection, on the other hand, refers tothe government policy of according protection to the domestic industries from foreigncompetition. There are a number of arguments for and against both free trade and protection.(ii) Under free trade, division of labour occurs on an international scale leading to greater specialisation, efficiency and economy in production.
ARGUMENTS FOR PROTECTION
Theoretically speaking, free trade has certain virtues, as we have seen above. But, inreality, government are
ARGUMENTS FOR FREE TRADE
The important arguments in favour of free trade are as follows:(i) Free trade leads to the most economic utilisation of the productive resources of theworld because under free trade each country will specialise in the production of thosegoods for which it is best suited and will import from other countries those goods whichcan be produced domestically only at a comparative disadvantage.(Iii) As there will be intense competition under free trade, the inefficient producers arecompelled either to improve their efficiency or to quit.(Iv) Free trade helps to break domestic monopolies and free the consumers fromexploitation.(v) Free trade benefits the consumers.in different ways. It enables them to obtain goodsfrom the cheapest source. Free trade also makes available large varieties of goods.(v i) Further, under free trade there is no much scope for corruption which is rampantunder protection.
 
encouraged to resort to some manner of protective measures of safeguard the nationalinterest. There are a number of arguments put forward in favour of protection. Some of these arguments are very valid while some others are not. We provide below the gist of the popular arguments for protection.(i) Infant Industry Argument The infant industry argument advanced byAlexander Hamilton, Frederick List and others asserts that a new industryhaving a potential comparative advantage may no_ get started in a countryunless it is given temporary protection against foreign competition. Anestablished industry is normally much more stronger than an infant one because of the advantageous position of the established industry like itslongstanding experience, internal and external economies, resource position,market power, etc. Hence, if the infant is to compete with such a powerfulforeign competitor, it will be a competition between unequals and this wouldresult in the ruin of the infant industry. Therefore, if a new industry having a potential comparative advantage is not protected against the competition of anunequally powerful foreign industry, it will be denying the country the chanceto develop the industry for which it has sufficient potential. The intention isnot to give protection for ever but only for a period to enable the new industryto overcome its teething troubles. The policy of protection has been wellexpressed in the following words: "Nurse the baby, Protect the child and Freethe adult".The infant industry argument, however, has not been received favourably by someeconomists. They argue that an infant will always be an infant if it is given protection.Further, it is very difficult for a government to identify an industry that deservesinfant industry protection. "The infant industry argument. boils down to a case for theremoval of obstacles to the growth of the infants. It does not demonstrate that a tariff is the most efficient means of attaining the objective." J(ii) Diversification Argument It is necessary to have a diversified industrialstructure for an economy to be strong and reasonably self-sufficient. Aneconomy that depends on a very limited number of industries is subject tomany risks. A depression or recession in these industries will seriously affectthe economy. A country relying too much. on foreign countries runs a number of risks. Changes in political relations and international economic conditionsmay put the country into difficulties. Hence, a diversified industrial structureis necessary to maintain stability and acquire strength. It is, therefore, advisedto develop a range of industries by according protection to those which requireit.(iii) Improving the Terms of Trade It is argued that the terms of trade can beimproved by imposing import duty or quota. By imposing tariff the countryexpects to obtain larger quantity of imports for a given amount of exports, or conversely, to part with a lesser quantity of exports for a given amount ofim- ports. But the terms of trade could be expected to improve only if the foreignsupply is inelastic. If the foreign supply is very much elastic a tariff or a quotais unlikely to improve the terms of trade, there is also the possibility that the
 
foreign countries will retaliate by imposing counter tariffs und quotas. Thevalidity of this argument, is therefore, questionable.(iv) Improving Balance of Payments This is a very common ground for protection.By restricting imports, a country may try to improve its balance of payments position. The developing countries, especially, may have the problem of foreign exchange shortage. Hence, it is necessary to control imports so that thelimited foreign exchange will be available for importing the necessary items.In developing countries, generally, there is a preference for foreign goods.Under such circumstances it is necessary to control unnecessary imports lestthe balance ofi payments position become critical.(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure.Dumping, certainly, can do harm to the domestic industry; the relief theconsumers get will only be temporary. It is possible that after ruining thedomestic industry by dumping, the foreign firms will obtain monopoly powersand exploit the home market. Sometimes, dumping represents a transmissionof the recession abroad to the home country. These factors point out the needto protect domestic industries against dumping.(vi) Bargaining It is argued that a country which already has a tariff can use it as ameans of bargaining to obtain from other countries lower duties on its .exports. It has been pointed out, however, that the bargaining lever, instead of  being used to gain tariff concessions from foreign powers, may be employed by others to extract additional protection from the home government.(vii) Employment Argument Protection has been advocated also as a measure tostimulate domestic economy and expand employment opportunities. Restric-tion of imports will stimulate import competing industries and its spreadeffects will help the growth of other industries. These, naturally, create moreemployment opportunities.This method of employment generation, however, has some problems. First,when we reduce imports from foreign countries employment and income willshrink abroad and this is likely to lead to a fall in the demand for our exports.Secondly, the foreign countries will be tempted to retaliate in order to protecttheir employment.(viii) National Defense Even if purely economic factors do not justify such a courseof action, certain industries will have to be developed domestically due tostrategic reasons. Depending on foreign countries for our defenserequirements is rather foolish because factors like change in political relationscan do serious damage to a country's defense interest. Hence, it is advisable todevelop defense and other industries of strategic importance by providing protection if they cannot survive without protection.(ix) Key Industry Argument It is also argued that a country should develop its ownkey industries because the development of other industries and the economydepends a lot on the output of the key industries. Hence, if we 40 not have our own source of supply of key inputs, we will be placing ourselves at the mercyof the foreign suppliers. The key industries should therefore be given protection if that is necessary for their growth and survival.

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