Академический Документы
Профессиональный Документы
Культура Документы
Learning outcomes
Free trade refers to the trade that is free from all artificial barriers to trade like tariffs,
quantitative restrictions, exchange controls, etc. Protection, on the other hand, refers to
the government policy of according protection to the domestic industries from foreign
competition. There are a number of arguments for and against both free trade and
protection.
Theoretically speaking, free trade has certain virtues, as we have seen above. But, in
reality, government are
encouraged to resort to some manner of protective measures of safeguard the national
interest. There are a number of arguments put forward in favour of protection. Some of
these arguments are very valid while some others are not. We provide below the gist of
the popular arguments for protection.
The oft cited examples of industries developed with the support of the strategic trade
policy include the steel industry in Japan in the 1950s, semiconductors in the 1970s _nd
1980s, and the development of the supersonic aircraft, Concorde, in Europe in the 1970s
and the development of the Airbus aircraft in the 1980s.
As Salvatore observes, while strategic trade policy can theoretically improve the market
outcome in oligopolistic markets subject to extensive economies and increase the nation's
growth and welfare, even the originators and popularisers of this theory recognise the
serious difficulties in carryingl it out. The following difficult\es are pointed out/ in
particular. First, it is extremely difficult to choose the wimiers (i.e. choose the industries
that will provide large externaly economies in the future) and devise appropriate policies
to successfully n\lrture them. Secondly, since most leading nations undertake strategic
trade policies at the same time, their efforts are largely neutralised so that the potential
benefits to each may be small. Thirdly, when a country does achieve substantial success
with strategic trade policy, this comes at the expense of other countries (i.e., it is a
'beggar-thy-neighbour' policy) and so, other countries are likely to retaliate.
DEMERITS OF PROTECTION
The period of over two-and-a-half decades until the early 1970s witnessed rapid
expansion of the world output and trade. World trade, in fact, grew much faster than the
output. After the Second World War, there was a progressive trade liberalisation until the
early seventies. Thanks to the efforts of GATT, the "tariff reductions in the industrial
countries continued even after this. The average levels of tariff on manufactures in
industrial countries is now about 3 per cent compared to 40 per cent in 1947.
Although the period until the early 1970s was characterised by trade liberalisation in
general, there were several exceptions. In the developed countries, heavy protection was
given to the agricultural sector through import restrictions and domestic subsidies.
Further, in manufactured goods, textiles and clothe ing were subject to heavy protection.
There was also protection associated with regional trade agreements like the EEC.
Imports to developing countries were in general highly restrictive due to reasons such as
balance of payments problems and the need to protect infant industries. In the industrial
countries, anti dumping and counterveiling duties began to assume more importance
since the mid-sixties. The overall trend in the industrial countries, however, was one of
liberalisation. This trend was reversed in the seventies.
Since about the mid-seventies, protectionism has grown alanllingly in the developed
countries. This has taken mainly the fonn of non-tariff barriers (NTBs).
The main reason for the growing protectionism in industrialised countries is the
increasing competition they face from Japan and developing countries like, for example,
the South-East Asian countries. Due to the fact that the competition has been very severe
in the case of labour intensive products, the import competing industries in the advanced
countries have been facing the threat of large retrenchments. Several other industries, like
the automobile industry in the US, have also been facing similar problems. The demand
for protection has, therefore, grown in the industrial countries in order to protect
employment. Protective measures have also been employed to pressurise Japan and the
developing countries to open up their markets for goods, services and investments of the
industrial countries.
As mentioned earlier, the NTBs affect the exports of developing countries much more
than those of the developed ones. In other words, the main target of the developed
country import restrictions in the last two decades, or so, has been the developing
countries. By 1987, NTBs were estimated to have affected almost a third of OECD
imports from developing countries.4 While developing countries as a group now face
tariffs .10 per cent higher than the global average, the least developed countries face
tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest
potential for the poorest countries, such as textiles, leather and agricultural commodities.
Labour intensive products like textiles, clothing and footwear are among the most highly
protected imports. The restriction on the textiles and clothing, which account for nearly
one-fourth of the developing country exports, has been' exercised mainly by the Multi-
Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24
billion a year in terms of export earnings. Tariff escalation (i.e. increase in tariffs with the
level of processing) is yet another important factor which discourages developing
countries' manufactured goods. For example, while the tariff on raw sugar is less than 2
per cent, it is around 20 per cent for processed sugar products. The tariff escalation
discourages the developing countries' graduation as exporters of manufactured goods
from commodity exporters. Tariff escalation affects a wide variety of products such as
jute, spices, vegetables, vegetable oils, tropical fruits beverages, etc.
As the industrial countries face more competition, they increase protectionism. This
encourages one to think that they wanted free trade only as long as they enjoyed a
dominant position; when their dominance is challenged they increase the trade barriers
giving one or another reason. One should not be surprised if tomorrow they restrict the
imports from developing countries arguing that the cost advantage of the developing
countries is because of the 'injustice' done to the labour by paying wages lower than that
in the US or other industrial countries! Ironically, industrial countries are increasing trade
restrictions while the developing countries are liberalising trade.
Trade restrictions prove costly not only for the affected exporting country but also for the
importing country restricting the trade. The consumers often pay a heavy price for
protection. It is estimated that overall the American consumers pay as much as $ 75
billion a year more for goods on account of import fees and restrictions-a sum roughly
equivalent to about a sixth of the US import bill. In Canada every dollar earned by
workers who continue to hold their jobs because of protection of the textile and clothing
industries costs society an estimated $ 70. In the United States, consumers paid $
1,14,000 a year for each job saved in thc steel industry.7
POINTS TO PONDER:
___________________________________
Free Trade
Meaning:
___________________________________
Free trade refers to the trade that is
free from all artificial barriers to trade like ___________________________________
tariffs, quantitative restrictions, exchange
controls, etc.
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
Protection
Meaning:
___________________________________
Protection, on the other hand, refers to
the government policy of according protection ___________________________________
to the domestic industries from foreign
competition.
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
Arguments for Free Trade
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
Arguments for Protection
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
Demerits of Protection
Protection is against the interest of consumers as it
___________________________________
increases price and reduces variety and choice.
Protection makes producers and sellers less
quality conscious.
___________________________________
It encourages domestic monopolies.
Even inefficient firms may feel secure under
protection and it discourages' innovation.
___________________________________
Protection leaves the arena open to corruption.
It reduces the volume of foreign trade. ___________________________________
___________________________________
___________________________________
Questions for self assessment:
2. Present your views on protection vs liberal trade in respect of a developing country like
India.
3. What are the advantages and disadvantages of free trade for a developing economy?
4. What, in your opinion, is the right trade strategy for India in the emerging international
economic environment?
5. Review the trade liberalisation in India and its impact and implications.
(iii) "When we buy manufactured goods abroad we get the goods and the
foreigner gets money. When we buy the manufactured goods at home we get both the
goods and the money". Discuss.
SUGGESTED READINGS
Ellsworth, P.T. and 1. Clark Leith, The International Economy, London: Macmillan
Company.
Haberler, Gottfried, The Theory of International Trade, London: William Hodge Co.
Johnson, Harry, G., Aspects of the Theory of Tariffs, London: George Allen and Unwin.
Towle, Lawrence, W., International Trade and Commercial Policy, New York: Harper
and Bros.
Wells, Sidney J., International Economics, London: George Allen and Unwin Ltd.