The Protectionisinm & Free Trade

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Protectionism and Free Trade
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Note on Trade Protectionism and Free
1 of 32 08-Mar-19, 3:42 PM
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TRADE PROTECTIONISM
In order to prevent domination by foreign goods, to
safeguard in domestic industries and to attain micro
economics stability, government may impose various
types of restriction to control the inflow of foreign goods
in the domestic market. Such majors are called trade
protectionism. It can be classified into two following
types:
Tariff Barrier
Tariff barriers refer to imposing a high rate of import tax
in the foreign goods. This increased the price of foreign
goods and they become more expensivecompared to
domestic product. This discourages the foreign good
2 of 32 08-Mar-19, 3:42 PM
from imports.
Non-Tariff Barrier
Besides imposing a
tariff,government may adopt
another mechanism like a
quota, exchange rate policy,
export subsidies to a
domestic product, lengthy
documentation process,
etc. to discourage inflow of
foreign goods and to
promote domestic products.
These mechanism are
called non-tariff barrier.
ADVANTAGES OFTRADE
PROTECTIONISM
The following are the main
arguments for trade
protection:
1. Protection of infant
industries
Infant industries are those
industries that involve a new
technology in the production.
Thus, their production is very
high and quantitative. Trade
protection policy is adopted
by a country to protect such
infant industries.
2. Protection of sick
3 of 32 08-Mar-19, 3:42 PM
industries
We
can
find
a
number
of
sick
industries
of
the
primary
sector
in
a
country.
We
must
protect
such
industries
avoiding
their
negative
effect
such
as
medicine
industries.
3. Protect
strategic
industries
Strategic
industries
such
as
energy,
water,
steel,
etc.
are
too
essential
for
the
4 of 32 08-Mar-19, 3:42 PM
development
of
a
nation.
So
,
the
protection
of
such
industries
are
very
necessary.
Thus,
the
protectionism
is
to
protect
such
industries.
4. Employment
opportunities
Trade
protection
policy
may
be
adopted
to
protect
nation
industries
for
generating
employment
opportunities
in
the
nation
in
the
short
run
5 of 32 08-Mar-19, 3:42 PM
but
such
policy
has
not
been
found
practicable
in
a
long
run.
5. To
save
environment
degradation
Trade
protection
policy
may
be
adopted
to
protect
the
environment
such
from
the
air
pollution
due
to
imports
of
a
vehicle
.
6. Protect
nonrenewable
resources
Trade
protection
policy
6 of 32 08-Mar-19, 3:42 PM
is
adopted
to
protect
nonrenewable
resources
like
coal,
petroleum
products,
etc.
DISADVANTAGES
OFTRADE
PROTECTIONISM
1. Possibility
When
the
government
protects
few
domestic
industries,
they
may
create
monopoly
power
in
a
domestic
market.
So,
the
consumers
may
have
to
compromise
with
low
quality
and
high
quality.
7 of 32 08-Mar-19, 3:42 PM
2. Fear
of
Dependency
Once
the
government
provides
various
facilities
to
domestic
production
business,
the
industrialist
becomes
dependent
on
the
government
support.
So,
they
may
go
to
protest
if
the
government
attempts
to
withdraw
its
support
at
any
moment.
3. Income
Inequality
In
most
of
the
8 of 32 08-Mar-19, 3:42 PM
underdeveloped
countries,
factors
are
run
by
the
class
which
has
high
level
of
income.
Giving
protection
to
these
factories
means
to
make
richer
people
wealthier
while
the
poor
people
may
not
get
anything.
This
increases
the
gap
between
rich
and
poor.
Hence,
the
rich
gets
richer
9 of 32 08-Mar-19, 3:42 PM
and
poor
gets
poorer.
4. Loss
in
consumers
welfare
Protectionism
discourages
the
inflow
of
foreign
goods
in
the
market.
Hence,
there
is
limited
choice
for
the
consumers.
Due
to
absences
of
competition,
the
quality
of
goods
and
prices
may
not
remain
in
a
favour
of
general
10 of 32 08-Mar-19, 3:42 PM
consumers.
5. Dispute
among
the
countries
Protectionism
creates
misunderstanding
among
the
nations.
If
one
country
uses
protection
mechanism,
the
other
country
is
also
expected
to
adopt
similar
policies.
Hence,
it
creates
conflict
among
the
countries.
6. Effects
in
Employment
Opportunities
The
absence
of
competition
in
this
11 of 32 08-Mar-19, 3:42 PM
policy
does
not
enhance
the
firm's
efficiency
and
entrepreneurs
may
not
take
initiatives
for
the
growth
of
their
business.
this
ultimately
affects
employment
opportunities
in
the
long
run.
FREE
TRADE
Simply,
free
trade
is
12 of 32 08-Mar-19, 3:42 PM
policy
of
freedom
in
trade.
Free
trade
is
the
process
where
the
goods
and
services
are
traded
freely
without
any
restriction.
It
enables
lower
price
13 of 32 08-Mar-19, 3:42 PM
for
consumers.
In
case
of
free
trade,
all
the
tariff
and
non-
tariff
barriers
are
completely
removed
to
allow
competition.
According
to
Adam
Smith,
"The
14 of 32 08-Mar-19, 3:42 PM
term
free
trade
has
been
used
denoted
system
of
commercial
policy
which
draws
not
distinction
between
domestic
and
foreign
commodities
and
thus
which
neither
imposes
15 of 32 08-Mar-19, 3:42 PM
an
additional
burden
on
the
later
nor
grants
any
special
favour
to
the
former."
ADVANTAGES
OF
FREE
TRADE
1. Benefits
of
Comparative
Advantages
Free
trade
enables
countries
to
specialise
16 of 32 08-Mar-19, 3:42 PM
in
those
goods
where
they
have
comparative
advantage.
There
can
be
an
increase
in
economic
welfare
by
specialising
in
goods
where
countries
have
lower
17 of 32 08-Mar-19, 3:42 PM
opportunity.
2. Resource
Allocation
Trade
improves
global
efficiency
in
resource
allocation.
A
glass
of
water
may
be
of
little
value
to
someone
living
near
the
river
but
is
priceless
to
a
person
crossing
the
Sahara
Desert.
Trade
delivers
goods
and
services
to
those
who
value
them
18 of 32 08-Mar-19, 3:42 PM
most.
3. Make
use
of
Surplus
Raw
Materials
Free
trade
utilizes
the
surplus
raw
materials
of
a
country.
Likewise,
Qatar
is
very
rich
in
reserves
of
oil
but
without
trade,
there
would
be
not
much
benefit
in
having
so
much
oil.
4. Economies
of
Scale
The
19 of 32 08-Mar-19, 3:42 PM
country
can
benefit
from
economies
scale
if
they
can
specialize
their
certain
goods.
The
benefits
of
economies
of
scale
will
ultimately
lead
to
lower
prices
for
consumers
and
greater
efficiency
for
exporting
firms.
5. Benefit
to
Consumer
Free
trade
is
beneficial
for
the
consumer
as
they
20 of 32 08-Mar-19, 3:42 PM
can
get
the
best
services
at
lower
price
and
save
the
remaining
or
enhance
their
living.
6. Increased
competition
With
more
trade,
there
will
be
for
sure
competition
among
the
domestic
firms.
Therefore
there
will
be
more
incentives
to
decrease
the
costs
and
increase
efficiency.
21 of 32 08-Mar-19, 3:42 PM
DISADVANTAGES
OF
FREE
TRADE
1. Case
of
Infant
Industries
For
newly
emerging
industries,
free
trade
creates
a
lot
of
problem
as
these
industries
don't
have
a
competitor
in
relation
to
price
and
quality.
2. Risk
of
Dumping
The
developed
countries
may
do
the
business
of
22 of 32 08-Mar-19, 3:42 PM
second-
hand
goods
and
obsolete
products
in
underdeveloped
countries.
This
can
create
harmful
effects
in
the
under
developed
countries.
3. Effects
on
Natural
Securities
The
foreign
business
enterprises
can
do
illegal
trading,
terrorist
activities,
drug
dealing
etc
in
the
name
of
doing
business.
This
can
affect
23 of 32 08-Mar-19, 3:42 PM
the
image
of
the
country
and
the
national
securities.
4. Effects
in
Domestic
Industrialization
Underdeveloped
countries
don't
have
the
high
production
capacity
to
compete
with
foreign
goods.
So,
they
become
highly
depended
on
imported
goods,
which
ultimately
affects
industrialization
in
the
adomestic
area.
5. Exhaustion
of
24 of 32 08-Mar-19, 3:42 PM
Natural
resources
Under
developing
countries
are
mostly
relying
on
primary
products
and
natural
resources
for
their
export.
So,
when
they
involve
in
free
trade,
there
is
a
highrisk
of
depletion
of
natural
resources.
Bibliography
Karna,
Dr.Surendra
Labh,
Bhawani
Prasad
Khanal
25 of 32 08-Mar-19, 3:42 PM
and
Neelam
Prasad
Chaulagain.
Economics.
Kathmandu:
Jupiter
Publisher
and
Distributors
Pvt.
Ltd,
2070.
Khanal,
Dr.
Rajesh
Keshar,
et
al.
Economics
II.
Kathmandu:
Januka
Publication
Pvt.
Ltd.,
26 of 32 08-Mar-19, 3:42 PM
2013.
Economics.
(n.d.).
Retrieved
06
27,
2016,
from
Benefits
of
free
trade:
http://www.economicshelp.org
/trade
/benefits_free_trade/
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Notes, Exercises, Videos, Tests and Things to Remember on Trade

Note on Trade Protectionism and Free

Note Things to remember

In order to prevent domination by foreign goods, to

safeguard in domestic industries and to attain micro

economics stability, government may impose various

types of restriction to control the inflow of foreign goods

in the domestic market. Such majors are called trade

protectionism. It can be classified into two following

Tariff barriers refer to imposing a high rate of import tax

in the foreign goods. This increased the price of foreign

goods and they become more expensivecompared to

domestic product. This discourages the foreign good

tariff,government may adopt

another mechanism like a

quota, exchange rate policy,

domestic product, lengthy

etc. to discourage inflow of

foreign goods and to

promote domestic products.

These mechanism are

called non-tariff barrier.

The following are the main

arguments for trade

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