You are on page 1of 5

Q.

Debate on free trade v/s protective trade [16]


Free Trade
A trade policy of placing no restrictions on the movement of goods between countries is known
as the policy of 'Free Trade.' Such a policy permits the flow of international commerce in its
natural environment, free of artificial impediments. Free trade is a policy followed by some
international markets in which countries' governments do not restrict imports from or exports to
other countries
The following arguments have been advanced in favour of free trade policy:
1. Comparative cost advantage:
Free trade is the natural outcome of the comparative costs advantage. It permits an allocation of
resources, and manpower in accordance with the principle of comparative advantage, which is
just an extension of the principle of division of labour.
2. More factor earnings:
Under free trade, factors of production will also be able to earn more, as they will be employed
for better use. Hence, wages, interest and rent will be higher under free trade than otherwise.
3. Cheaper imports:
Free trade procures import at cheap rates. It seems to be an attractive argument in favour of trade
at least from the customers point of view.
4. Enlarged market:
Free trade widens the size of the market as a result of which greater specialisation and a more
complex division of labour become possible. This brings about optimum production with costs
reduced everywhere, benefiting the world as a whole.

5. Competition:
Free trade policy encourages competition from abroad which induces domestic producers to
become more alert and improve their efficiency.
6. Restricted exploitation:
Free trade prevents growth of domestic monopolies and consumers exploitation due to
competition from abroad.
7. Greater welfare:
Free trade permits large varieties of consumption goods and improves consumers welfare.Thus,
free trade is the best commercial policy.
Disadvantages
1. Not level playing field - . Free trade policy runs smoothly if all the countries follow the
same. If some countries do not adopt it, the system cannot work gainfully.
2. Unfavourable terms of trade - Free trade may prove advantageous to developed and
technologically advanced nations, but less developed countries are certainly at a
disadvantage on account of unfavourable terms of trade.
3. Unhealthy competition - Competition induced under free trade is unfair and unhealthy.
Backward countries cannot compete with advanced countries.
4. Unequal distribution - Gains of trade are not equally distributed under free trade due to
unequal state of development of different countries.
5. Free trade policy void - A country with unfavourable balance of payments finds it
difficult to overcome this situation under free trade policy.
6. Self-reliance - Free trade may encourage interdependence and discourage selfsufficiency. But, in the matter of defence each country should have self-reliance and selfsufficiency as far as possible.

Protective trade
Protectionism is the economic policy of restraining trade between states (countries) through
methods such as tariffs on imported goods, restrictive quotas, and a variety of other government
regulations designed to allow (according to proponents) fair competition between imports and goods
and services produced domestically.

Arguments in favour of protectionism


Infant industry argument: It is argued that government should go in for protectionist measure
to protect infant industries, or else they will not get an opportunity to survive due to international
trade.
Efforts of a developing country to diversify: Developing countries need to protect industries in
which they want to diversify.
Protection of employment: Protecting domestic industries also means protecting domestic
employment.
Source of government revenue: Tariffs form a good source of revenue for governments.
Strategic arguments: it means use of a tariff to protect military capability. The idea is, to
consume the goods of our country to promote the national industry and so, in the case of war we
don't have to buy the products in a foreign country and our industries have the capacity to
produce all the goods that our country need. We want tariffs to reduce the dependence on
international resources.
Means to overcome a balance of payments disequilibrium: High imports as compared to
exports might lead to severe balance of payments issues. Government might resort to
protectionist measures such as tariffs and quotas to restrict import and thereby control the
balance of payment disequilibrium.
Anti-dumping: Dumping is when manufacturers export a product to another country at a price
either below the price charged in its home market. This harms the domestic industry and
employment. The importing country might resort to protectionist measures such as tariffs to
control dumping of these goods.
Arguments against Protectionism
Misallocation of resources: It leads to global misallocation of resources, as it supports
inefficient producers and in certain cases (tariffs and quotas) consumer surplus is scarified.
The danger of retaliation and trade wars: Continuous protectionist measures by a country
might lead to retaliation of other countries and they might also put protectionist measures on the
imports.

The potential for corruption: Putting administrative controls might also lead to corruption.
Increased costs of production due to lack of competition: Constant protection to the domestic
producers and lack of competition propagates inefficiency and lack of initiative to control cost.
Higher prices for domestic consumers: As we can see due to tariffs and quotas domestic
consumers end up paying more.
Increased costs of imported factors of production: Imported goods become expensive which
might also lead to imported inflation.
Reduced export competitiveness: Continuous protection to domestic industries (such as
subsidies) might make them inefficient in terms of cost and technology. In the long run they
might become uncompetitive in the exports market.

Short Term Impact - If protectionism is use for short term as a protective measure it can give
following advantages.

If a country wants to grow in a new industry, protectionism is good to adopt in such


conditions as it will protect the new growing industry from already established foreign
competitors. This will give a time to new industries to learn and develop competitive
advantage.
Protectionism also beneficial in lowering ratio of unemployment in a country. It is
because companies are restricted by tariffs, quotas and other methods which compel them to
hire local workers.

Long term Impact - In long-term, protectionism has lots of disadvantages or threats for home
industry.

As there is no competition in protectionism, it makes industries weak in terms of


innovation and improvement.
It also results in more layoffs and burnout.
Consumer dissatisfaction also arises with long-term protectionism as they have to pay
more for a bad quality or low quality product.
Protectionism restricting industries from innovation and over-specialization which in turn
results in unemployment.
It also results in trade war, as action of imposing protectionism by one country will result
in retaliatory by other companies. Retaliatory actions mean an increase in cost of importing
of new technologies

Conclusion
Perhaps the most important policy issue of an international trade course is to answer the question
Should a country pursue free trade or some type of selected protection? The reason is that both
free trade and selected protection have both positive and negative aspects. No one policy choice
is clearly superior. Nonetheless, economists who have studied trade theory and policy tend to
support free trade more.

You might also like