Protectionism versus Free Trade

PROTECTIONISM:

Protectionism is a form of government activity that restricts for restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition. It is a deliberate attempt to limit imports or promote exports by putting up barriers to trade.

Historically, protectionism was associated with economic theories such as mercantilism i.e. believed it is beneficial to maintain a positive trade balance and import substitution. According to Cambridge University professor Ha-Joon Chang, virtually all developed countries today successfully promote their national industries through protectionism.

Methods of Protectionism are:

·         Import Tariffs:  Which are taxes, or duties, on imported goods designed to raise the price to the level of, or above the existing domestic price.

·         Quotas: It a non-tariff barrier method, a quota is a limit to the quantity coming into a country and in turn increases the market price of the imported goods.

·         Subsidies or tax cut to local business: Governments may also give subsidies to domestic firms, which can then be used to help reduce price and deter imports.

·         Anti-Dumping laws: Prevent dumping of cheaper foreign goods that would cause local firms close down.

·         Exchange rate manipulation: Monetary protection involves countries deliberately devaluing their exchange rates to stimulate exports and deter imports.

·         Red Tapism: Excessive bureaucracy associated with the process of importing and exporting may also restrict trade. For example, goods may be deliberately held-up at ports and airports, and there may be unnecessarily complex and lengthy paperwork associated with international transactions.

·         Preferential Government spending: By American government act federal legislation which called upon the US government prefers US made products in its purchases.

Motives for Protectionism are:

Protectionism keeps the domestic economy flowing since there is decrease in imports, domestic firms have less competition and so are able to continue.

·         Protect Infant industries: It allows green, fledging firms to function and develop at a decent rate; these firms are not pressurized by more experienced & foreign firms.

·         Protect strategic industries: It protects industries such as energy, water, steel, armaments and food.

·         Dumping: This is where foreign, ground economies enter an economy and sell their goods at a lower price.

·         Curbs Unemployment: Domestic firms are able to sell and productive more goods with less difficulty, giving firms less incentive to decreasing cost by decreasing workforce.

·         Help the environment: It helps protect environment by decreasing the foreign trade hence decreasing the use of transport.

Protectionism essentially means refraining from international trade in order to protect domestic industry providing infant industries enough time to learn how to produce goods efficiently and develop their own competitive advantage. It also temporarily creates jobs for domestic workers, helps in narrowing the balance of payment deficit and in turn ensures survival of domestic firms in the long run. However, it is believed that in the long run, protectionism weakens the industry as without competition companies won’t innovate and improve their products and services.

 

FREE TRADE:

For more than two centuries economists have steadfastly promoted free trade among nations as the best trade policy.

Political Economist ADAM SMITH said: "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage."

Free Trade is the unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties and quotas. Free trade is a win-win proposition because it enables nations to focus on their core competitive advantages, thereby maximizing economic output and fostering income growth for their citizens.

Free trade occurs when there is no protectionism. When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition and redirect, rather than create trade flows.

Advantages:

Increased production

Free trade enables countries to specialize in the production of those commodities in which they have a comparative advantage. With specialization, countries are able to take advantage of efficiencies generated from economies of scale and increased output. International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to increased production.

Production efficiencies

Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services. Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods.
 

Benefits to consumers

Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services. The increased competition ensures goods, services and inputs, are supplied at the lowest prices.

Foreign exchange gains

When a country sells overseas it receives hard currency from the countries that buy the goods. This money is then used to pay for imports that are produced more cheaply overseas.

Employment

Trade liberalization creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold (close down) in the competitive environment.

Economic growth

The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth. This is created by more competitive industries, increased productivity, efficiency and production levels.

Thus, for a better economy, we need to increase innovation and human capital in different sectors. Free trade is the best policy to increase the competition in any market. Free trade will bring more markets and employment and the standard of living thus increase the purchasing power and consumption. This will increase the market of other domestic sectors leading to higher GDP of economies.