Free Trade and Protectionism

Free trade:

If the government does not impose any kind of restriction on export and import of goods and services, it is defined as free trade. The movement of goods and services can be made without any restriction from country to country. The government does not interfere or impose any kind of barrier on import and export of goods.

However, it does not mean that the duties or taxes are not imposed on the export and import of goods and services. Rather the taxes are imposed without any discrimination between domestic and foreign goods.

Advantages/ Arguments in favor of free trade:

The advantages of free trade is as follows.

1. The benefit of specialization:

Free trade encourages the division of labor due to which a country is specialized to produce certain kinds of goods in the country. This helps to increase the efficiency of the resources of the country and produce high-quality goods at a lower cost.

2. Benefits to international consumers:

Free trade policy benefits the consumers of international market through the exchange of the best quality goods and services at the minimum prices. Under this policy, every country specializes in production and exchanges those goods which can be produced at a comparative cost advantage. As a result, international consumers would be able to consume any types of products they like.

3. Promotes healthy competition:

When the free trade policy is adopted, healthy competition with the foreign producers will be promoted. It also helps to reduce per unit cost of production, exchange policy, consumption pattern, and develop the skills of resources of the country.

4. Expansion of the market:

When the movement of goods are not restricted from one country to another, the market of a product is expanded in a wide range. The domestic goods can be supplied in the international market and the activity of trade of a country is expanded with the rest of the world.

5. The gain of technology:

New and improved technology is required for industrial development. Hence, developing countries which are backward in technology can import suitable technology from foreign countries.

6. The gain of capital:

The developing countries are suffering from a lack of capital. Free trade policy can attract foreign capital. The inflow of capital from foreign countries helps to accelerate economic development.

7. Increase in production:

Due to free trade, the production of a country can be easily exported to another country. As a result, domestic producers produce goods not only for the local market but also for the international market. This leads to an increase in the production of goods and services.

8. Cheaper price:

A country produces such a commodity whose production cost is the lowest one. With free trade, people can consume goods at the lowest price. It ends the monopoly and helps in proper utilization of the raw materials in the country.

Disadvantages/ Argument against free trade:

The disadvantages of free trade are as follows:

1. Exhaustion of natural resources:

When a developing the country adopts the policy of free trade, its natural resources are easily exported to the developed countries in the form of raw materials. In this way, the developed countries exploit the developing countries and exhaust natural resources very soon.

2. Adverse effect on domestic industries:

The industries of developing countries are not well flourished. They are running in an infant stage. Under a free trade policy, the infant industries cannot compete with the well-developed industries of the developed countries.

3. Economic dependency:

Under free trade, a country produces only those goods which comparatively cost the least. For all the other goods which are not produced within the country, the country has to depend on other countries. So, the countries which adopt free trade policy will have to accept the economic dependencies on other countries.

4. Dumping:

Free trade policy creates cutthroat competition among the producers. It will lead to unfair competition, which promotes the method of dumping to harass and dominate foreign competitors. Dumping is a method of selling the products at a lower price than the cost in the foreign market. This method is applied for a temporary period. When the competitors are unable to produce and sell the goods, the price is raised.

5. Import of harmful goods:

Free trade policy encourages exchanging all kinds of goods without any restriction. It is possible to import harmful commodities in the country. The import of harmful drugs can ruin the health of the nation.

6. Reduction in savings and investment:

Under the free trade policy, the volume of imports of foreign goods increases even in poor countries. It makes the people of the poor countries habituated to consume unnecessary and luxurious goods. Due to an increase in the volume of consumption, the rate of savings and investment falls.

7. Economic crisis:

Under the free trade policy, if there arises the situation of inflation, depression, etc, in a country, it spreads like an epidemic all over the world. Therefore, free trade policy is not considered as correct and appropriate.

Protectionism

Protectionism is a policy which encourages the national industries by imposing restrictions on the import of foreign goods or by providing facilities to domestic products. In other words, the protection is that policy under which the government makes the partial or whole control on the import of the foreign products for the development and expansion of the industries established in the country. The objective of protection is to safeguard the national industries from foreign competition.

Methods of protection:

1. Tariff barrier:

It refers to the high customs duty imposed on the import of foreign goods. When the custom duty is increased, the price of foreign goods increases. The increase in the price reduces the demand for foreign goods and thus import decreases.

2. Non-tariff barrier:

It includes the methods of licensing and quota system on imports, exchange control, provision of direct subsidy on foreign trade through government enterprises, etc.

Advantages/ Arguments in favor of protectionism:

The advantages of protectionism are as follows:

1. Need for protecting infant industries:

National industries of the developing countries cannot compete with the well-flourished industries of the developed countries. They should be protected until they grow. There is a well-known saying, "Nurse the baby, feed the infant, and free the adult." So, the infant industries should be protected.

2. Diversification of industries:

Dependence on a few industries will not be reliable for a country. When only a few goods are produced within the country and other goods are imported, it will be risky for the economy. Therefore, it is argued that a country should diversify its industries by providing protection.

3. Generation of employment opportunities:

Generally, the people of the developing countries are suffering from unemployment, underemployment and disguised unemployment. Protectionism can help to promote new industries. By erecting tariff and non-tariff barriers, the market of domestic products can be expanded and the development of national industries is accelerated.

4. Correction of the balance of payment:

The trade policy of protectionism is an effective measure to correct the adverse balance of payment. When the value of imports exceeds the value of exports, the balance of payment becomes adverse. It is corrected when the exports are increased and imports are decreased. Higher taxes can reduce the imports and facilities can increase exports. It is the trade policy of protectionism.

5. Development of key industries:

It is argued that the development of key industries within the country is necessary for rapid industrialization. The key industries produce basic materials like machines, tools, chemicals, power, etc. which are required for other industries. A developing country should not depend on imports for such materials. Therefore, protectionism is necessary for such industries.

6. To prevent dumping:

The well-developed industries of foreign countries can use a method of dumping to crush the national industries of the developing countries. They can export their products at a lower price below the cost for a temporary period. In this situation, the national industries cannot survive due to tough competition. Therefore, protection policy is necessary to prevent dumping.

7. National defense:

Defense of the country is a strong argument in favor of the policy of protectionism. The top most priority should be given for the existence of the nation. Therefore, the defense materials should be produced within the country and the industries which produce Such materials should be protected.

8. To preserve natural resources:

If the free trade the policy is adopted, resources are exported rapidly in the form of raw materials. It is economically harmful to the developing Countries because the raw materials are exported at a lower price and the natural resources are exhausted very soon. So, it is necessary to preserve them by the method of protectionism.

9. Self-dependent:

No country should be dependent upon the others for the most essential goods and services. The industries which fulfill national necessity should be established in the protection of the government.

Disadvantages/ Arguments against protectionism:

The disadvantages of protectionism are as follows:

1. Creation of vested interest:

Once protection is given to the domestic industries with the consideration of infant stage, they never agree that they have become adult. The domestic industries always want to receive facilities given by the government and when it tries to remove, they create unrest by means of strike and lockouts. The facility of protection becomes the vested interest of the industries.

2. Idleness in industries:

The industries which are protected may become idle. They do not try to improve and produce higher quality goods. In the absence of competition, the industries earn profit without the improvement of technology and management. So, the progress of the industries will be handicapped due to the policy of protectionism.

3. The burden on consumers:

According to the policy of protectionism, high custom duty is levied on imported goods. Higher tax raises the price and the burden of a higher price should be borne by the consumers. Moreover, the policy of protectionism restricts the imports and the choice of consumer goods will be limited.

4. Creation of monopoly:

Protection policy removes the competition of foreign industries. In the absence of foreign competition, the domestic industries can form a combination and remove the internal competition. It will create the situation of monopoly and the consumers should pay higher prices.

5. Promotion of inequality:

Under the policy of protectionism, special facilities are provided to the domestic industries. Generally, rich people own the industries. In this way, the facilities given for protection promote inequality in society.

6. The perpetuation of inefficient concerns:

Under the policy of protection, the government provides the facility to the weak and inefficient industries. It helps to perpetuate the sick industries in the country which are not beneficial for the economy.

7. The danger of retaliation:

If a country adopts the policy of protection, other countries may also follow the same in response. In this situation, the country cannot export its commodities. It will create misunderstanding among the countries and international trade is adversely affected.