International Trade Unit

FREE TRADE AND PROTECTIONISM

ARGUMENTS FOR PROTECTIONISM

If international trade is so good for all countries concerned, why is it that countries do not trade freely? Why do they often protect their economies from imports?
Protecting

domestic employment Protecting the economy from low-cost labour

ARGUMENTS FOR PROTECTIONISM Protecting an infant (sunrise) industry To avoid the risks of over-specialization

There

are no real arguments against this view. It does not promote protectionism, it simply points out the problems that countries may face if they specialize to a great extent.

ARGUMENTS FOR PROTECTIONISM

Strategic reasons
It

is sometimes argued that certain industries need to be protected in case they are needed at times of war is the selling by a country of large quantities of a commodity, at a price lower than its production cost, in another country

To prevent dumping
Dumping

ARGUMENTS FOR PROTECTIONISM

To protect product standards

A

country might wish to impose safety, health, or environmental standards on goods being imported into its domestic market, in order to ensure that the imports match the standards of domestic products many developing countries, it is difficult to collect taxes and so governments impose import taxes (tariffs) on products in order to raise revenue

To raise government revenue

In

To correct a balance of payments deficit

ARGUMENTS AGAINST PROTECTIONISM

Protectionism may raise prices to consumers and producers of the imports that they buy. Protectionism would lead to less choice for consumers. Competition would diminish if foreign firms are kept out of a country, and so domestic firms may become inefficient without the incentive to minimize costs. Innovation may also be reduced for the same reason. Protectionism distorts comparative advantage, leading to the inefficient use of the worlds resources. Specialization is reduced and this would reduce the potential level of the worlds output. For the reasons listed above, protectionism may hinder economic growth.

TYPES OF PROTECTIONISM

TYPES OF PROTECTIONISM - TARIFFS

TYPES OF PROTECTIONISM - SUBSIDIES

TYPES OF PROTECTIONISM - QUOTAS

TYPES OF PROTECTIONISM - VERS

Voluntary exports restraints are agreements between exporting and importing countries in which the exporting country agrees to limit the quantity of exports of a specific good below a certain level. This is usually to avoid the imposition of legal restrictions by the importing country.

TYPES OF PROTECTIONISM ADMINISTRATIVE BARRIERS When goods are being imported, there are usually administrative processes that have to be undertaken. This may be known as red tape. If these processes are lengthy and complicated, then they can act as a restriction to imports.

TYPES OF PROTECTIONISM HEALTH AND SAFETY STANDARDS This is where various restrictions are placed upon the types of goods that can be sold in the domestic market, or on the methods used in the manufacture of certain goods. These regulations will apply to imports and may restrict their entry.

TYPES OF PROTECTIONISM - EMBARGOES

In effect, an embargo is an extreme quota. It is a complete ban on imports and is usually put in place as a form of political punishment. For example, the US has a trade embargo on all products from Cuba.

TYPES OF PROTECTIONISM NATIONALISTIC CAMPAIGNS

Governments will sometimes run marketing campaigns to encourage people to buy domestic goods instead of foreign ones in order to generate more demand for domestic goods and preserve domestic jobs. Such campaigns have happened in countries such as the UK, Australia, and the US. This may be described as moral suasion, where the government links consumption of imported goods to the creation of unemployment.

Free Trade and Protectionism

THE WORLD TRADE ORGANIZATION

AIMS OF THE WTO

The functions of the WTO are:
To administer WTO trade agreements To be a forum for trade negotiations To handle trade disputes among member countries To monitor national trade policies To provide technical assistance and training for developing countries To cooperate with other international organizations

IS THE WTO A SUCCESS OR A FAILURE?

The WTO claims that there are a number of benefits to be gained from its work:

The system helps to promote peace in the world. The more that countries trade freely, the less likely that they are to be in conflict. Disputes are now handled constructively and there is a forum for this to take place. Rules make life easier for everyone. Small countries have an equal say and gain from collective bargaining with larger countries. Freer trade cuts the cost of living for the majority of consumers. Freer trade provides more choice of products and better quality products. Trade raises incomes and stimulates economic growth. The system encourages good government.

IS THE WTO A SUCCESS OR FAILURE?

However, critics of the WTO raise a number of important points to consider:

The WTO supposedly operates on a consensus basis Many developing countries cannot afford to participate in all negotiations WTOs General Agreement on Trade and Services includes a long list of services that should be privatized Free trade does not make life better for ordinary people Unfairly biased towards the interests of multinational corporations Issues of health, safety at work, and environmental protection are too often ignored