Free Trade and Protection Homework Help

Free Trade

Free trade occurs when countries do not impose restrictions on the movements of goods and services between them. It enhances their living standards and results in better utilisation of their resources. 

However, it could result in over-specialisation and dependence on a few products. This would make a country vulnerable in times of changes in world demand. 

As a result, most countries implement some form of trade restrictions.

Restrictions on International Trade

a) Tariffs

This is the most common barrier to trade. Tariffs may be ad valorem or specific. They act by raising the price of imports as they enter the country.

b) Subsidies

Subsidies are grants or payments to producer by the government. They tend to lower the prices and encourage consumption of local products in preference to imported goods.

c) Quotas

A quota is the most serious kind of restriction. It places a physical limitation on the quantity of inputs allowed into a country.

d) Exchange Control

A system of exchange control will limit the amount of foreign currency people could acquire. Since importers require foreign currency to pay for imports, the volume of imports could be controlled by controlling the issue of foreign currency.

Arguments Advanced for Protection

Protectionism is a policy for protecting home industries from foreign competition by the imposition of trade restriction. There are many arguments put forth in favour of protectionism.

a) ‘Key Industry’ Argument

Some industries e.g. iron and steel, agriculture and scientific instruments are regarded as strategic industries which are essential in the event of a crisis. Such industries need protection to reduce a country’s dependence on imports of strategic materials.

b) ‘Infant Industry’ Argument

In the early stage of development, certain industries may not be able to compete with the established industries of the industrialised nations. Thus, protection is needed to enable such industries to reach a scale of production large enough to allow their costs to fall to a more competitive level.

c) ‘Employment’ Argument

Workers would become unemployed in industries which cannot compete with cheaper imports. Thus, tariffs are imposed to keep out the ‘cheaper’ imports

d) To Correct A Balance of Payment Deficit

If a country persistently suffers from a balance of payments deficit, it is losing gold and foreign exchange and it might be heading towards economic bankruptcy if the problem is not checked. Protection is needed to keep out imports in order to correct the deficit.

e) ‘Diversification of Industry’ Argument

A country should not depend on one or a few industries because this could lead to mass unemployment if foreign demand falls. In order to minimise these risks, it should produce a variety of goods and protection is accorded to them.

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