295807282 Free Trade vs Protective Trade

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 polic! 1. "omparative cost advantage!

Free trade is the natural outcome of the comparative costs advantage. t permits an allocation of resources, and manpower in accordance with the principle of comparative advantage, which is  !ust an extension of the principle of division of labour. labour. #. $ore factor earnings!

"nder free trade, factors of production will also be able to earn more, as they will be employed for better use. #ence, wages, interest and rent will be higher under free trade than otherwise. %. "heaper imports!

Free trade procures import at cheap rates. t seems to be an attractive argument in favour of trade at least from the customer$s point of view. &. 'nlarged mar(et!

Free trade widens the si%e of the market as a result of which greater specialisation and a more complex division of labour become possible. This brings about o ptimum production with costs reduced everywhere, benefiting the world as a whole.

). "ompetition!

Free trade policy encourages competition from abroad which induces domestic producers to  become more alert and improve their efficiency. 6. *estricted e+ploitation!

Free trade prevents growth of domestic monopolies and consumers$ exploitation due to competition from abroad. ,. -reater welfare!

Free trade permits large varieties of consumption goods and improves consumer$s welfare.Thus, free trade is the best commercial policy. &isadvantages . (ot level playing field ) . Free trade policy runs smoothly if all the countries follow the same. f some countries do not adopt it, the system cannot work gainfully. *. "nfavourable 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.

+. "nhealthy competition ) ompetition induced under free trade is unfair and unhealthy. -ackward countries cannot compete with advanced countries. . "ne/ual distribution ) 0ains of trade are not e/ually distributed under free trade due to une/ual state of development of different countries.

1. Free trade policy void ) A country with unfavourable balance of payments finds it difficult to overcome this situation under free trade policy. 2. Self)reliance ) Free trade may encourage interdependence and discourage self) sufficiency. -ut, in the matter of defence each country should have self)reliance and self) sufficiency as far as possible.

rotective 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.

rguments in favour of protectionism 0nfant industr argument 3 t 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. 'fforts of a developing countr to diversif!  &eveloping countries need to protect industries in which they want to diversify. rotection of emploment!  4rotecting domestic industries also means protecting domestic employment. ource of government revenue!  Tariffs form a good source of revenue for governments. trategic 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. 5e want tariffs to reduce the 6dependence7 on international resources.

8eans to overcome a balance of paments dise2uilibrium 3 #igh imports as compared to exports might lead to severe balance of payments issues. 0overnment might resort to  protectionist measures such as tariffs and /uotas to restrict import and thereby control the  balance of payment dise/uilibrium. nti3dumping!  &umping 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. rguments against rotectionism $isallocation of resources!  t leads to global misallocation of resources, as it supports inefficient producers and in certain cases 9tariffs and /uotas: consumer surplus is scarified.  The danger of retaliation and 4trade wars5! ontinuous 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!  4utting administrative controls might also lead to corruption. 0ncreased costs of production due to lac( of competition!  onstant protection to the domestic  producers and lack of competition propagates inefficiency and lack of initiative to control cost. igher prices for domestic consumers!  As we can see due to tariffs and /uotas domestic consumers end up paying more. 0ncreased costs of imported factors of production! mported goods become expensive which might also lead to imported inflation. *educed e+port competitiveness!  ontinuous protection to domestic industries 9such as subsidies: might make them inefficient in terms of cost and technology. n the long run they might become uncompetitive in the exports market.

Short Term mpact ) f protectionism is use for short term as a protective measure it can give following advantages. •

f 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

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advantage. 4rotectionism also beneficial in lowering ratio of unemployment in a country. t is  because companies are restricted by tariffs, /uotas and other methods which compel them to hire local workers.

;ong term mpact ) n long)term, protectionism has lots of disadvantages or threats for home industry. •

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As there is no competition in protectionism, it makes industries weak in terms of innovation and improvement. t also results in more layoffs and burnout. onsumer dissatisfaction also arises with long)term protectionism as they have to pay

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more for a bad /uality or low /uality product. 4rotectionism restricting industries from innovation and over)speciali%ation which in turn

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results in unemployment. t also results in trade war, as action of imposing protectionism by one country will result in retaliatory by other companies.