Protectionism and Free Trade

INTRODUCTION

Free trade is a system in which the trade of goods and services between countries flows
unhindered by government-imposed restrictions and interventions. Interventions include taxes
and tariffs, non-tariff barriers, such as regulatory legislation and quotas, and even inter-
government managed trade agreements such as the North American Free Trade Agreement
(NAFTA)

Free trade opposes all such interventions. One of the strongest arguments for free trade was made
by classical economist David Ricardo in his analysis of comparative advantage explains how
trade will benefit both parties (countries, regions, or individuals) if they have different
opportunity costs of production.

Protectionism, on the other hand is an economic policy of restricting trade between nations.
Trade may be restricted by high tariffs on imported or exported goods, restrictive quotas, a
variety of restrictive government regulations designed to discourage imports, and anti-dumping
laws designed to protect domestic industries from foreign take-over or competition.

Advantages of protectionism

1. A country‘s protectionism will mean the protection of home industries or infant

industries’
2. The fundamental of internal trade wouldn‘t involve trade activities across national
borders. Therefore this will reduce the special problem which often subsequently arise
during import and export; crisis such as, deals might have to be transacted in foreign
languages, foreign laws customs and regulation (protectionism frees such trauma).
3. Furthermore, having to export products from foreign countries will mean taking into
consideration its currency; worst of all if the exchange rate variation is wider than the
protectionist (country). Therefore such situation will create an exposure of taking debts to
fulfill the contract (partnership agreement) of import and export.
4. Protectionism have a positive impact on a country’s cultural identity.

Disadvantages of protectionism

1. Protectionism, an economic policy of restraining trade between nations, through methods

such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive
government regulations is designed to discourage imports, and prevent foreign take-over
of local markets and companies. This policy is closely aligned with anti-globalization.
2. Protectionism refers to policies or doctrines which "protect" businesses and "living
wages" within a country by restricting or regulating trade between foreign nations. Adam
 Smith famously warned against the 'interested sophistry' of industry, seeking to gain
advantage at the cost of the consumers.
3. All modern day economists agree that protectionism is harmful in that its costs outweigh
the benefits, and that it impedes economic growth.
4. No nation has all of the commodities that it needs. Some countries are abundant in certain
resources, while others may lack them. For example, Colombia and Brazil have the ideal
climate for growing coffee beans. The US is a major consumer of coffee, yet it does not
have the suitable climate to grow any of its own. Consequently, this has made Colombia
and Brazil big coffee exporters and the US big coffee importer. In this case, if the US
were practicing protectionism, then they can‘t import coffee.
5. Protectionism has also been accused of being one of the major causes of wars. According
to Frederic Bastiat, "When goods cannot cross borders, armies will." History following
this articulation is not lacking example such as; in 1930, facing only a mild recession, US
President Hoover ignored warning pleas in a petition by 1028 prominent economists and
signed the notorious Smoot-Hawley Act, which raised some tariffs to 100% levels.
Within a year, over 25 other governments retaliated by passing similar laws. What was
the result? World trade came to a grinding halt, and the entire world was plunged into the
"Great Depression" for the rest of the decade. The depression in turn led to World War II.

Advantages of free trade

1. Free trade is a large and unambiguous net gain for society. Open world trade increases
economic growth and raises living standards.
2. Free trade creates more jobs than it destroys because it allows countries to specialize in
the production of goods and services in which they have a comparative advantage.
3. Self interest is a catalyst, whereby, any normal business person or entrepreneur will
definitely like to work in an environment, where no barriers are levied to hinder what
he/she is planning to set forth. Again, it would lead individuals to specialize and
exchange goods services based on their own special abilities.
4. International competition helps the domestic industry to work with more efficiency.

Disadvantages of free trade

1. Domestic industries struggle against international competition.

2. Many developing countries rely on producing primary products where they currently
have a comparative advantage. However relying on agricultural products has several
disadvantages such as; Prices can fluctuate due to environmental factors. Therefore with
international economic growth, demand will only increase a little.
 3. Cultural Identity which is not really an economic argument but political and cultural.
Many countries wish to protect their countries from what they see as an Americanization
or commercialization of their countries.
4. Protection against dumping. The EU sold a lot of its food surplus from the CAP at very
low prices on the world market. This caused problems for world farmers because they
saw a big fall in their market prices.
5. Environmentally, it is argued that free trade can harm the environment because less
developed countries may use up natural reserves of raw materials to export.

Progressive Protectionism
“Pro Investment, Anti-Trade”

Progressive protectionism by contrast would instead allow countries to wean themselves off
export dependence. It would enable the rebuilding and re-diversification of domestic economies
by limiting what goods states let in and what funds they allow to enter or leave the country.
Having regained control of their economic future, countries can then set the levels of taxes and
agree the regulations needed to fund and facilitate this transition. National competition laws
would ensure that monopolies didn't develop behind protective barriers and an internationalist
approach to trade with poorer countries would insist that the gains from reduced levels of
international trade helped fund the move towards a localised economy that benefitted the poor
majority. In essence, this approach would make space for domestic funding and business to meet
most of the needs of society worldwide.

Progressive protectionism and India

After independence in 1947, India spent decades trying to survive without international trade.
The country ditched its model of local production for local consumption following a currency
crisis in the early 1990s that forced policymakers to ask the International Monetary Fund (IMF)
for help.

The IMF cash came with conditions- India had to open up to foreign investment, cut red tape and
remove trade barriers.

Many saw this as the start of India's reintegration into the global economy, and over the last 20
years liberalisation has connected its young, vibrant workforce with firms around the world.

Today, it is one of the world's top outsourcing destinations, with many of its workers powering
back-end IT systems, call centre’s and software development. This has also helped India to run a
trade surplus - whereby it sells more than it buys - in goods and services with the US.
Yet when it comes to its trade, there has been no such progress, with some even accusing the
country of travelling backwards. US President Donald Trump has repeatedly attacked Indian
duties on Harley Davidson motorcycles and American whiskey, despite trade between the two
countries having boomed in recent years.

In its latest report on global trade barriers, the US trade department singles out India as having
the highest tariffs "of any major world economy" - averaging 13.8%. It describes Indian trade
policy as opaque, unpredictable, and says it often leaves US firms drowning in paperwork.

Flagship government policies such as Make in India have aggressively courted foreign direct
investment while seeking to boost domestic manufacturing.

To achieve this, India has erected trade barriers against competitors. In the past, western
multinationals were the target. Today, China is seen as a rising threat.

The last year budget raised import duties on goods including sunglasses, cigarette lighters and
fruit juice to discourage Chinese imports.

India has also spent the last four years defending its multibillion-dollar food-security
programme, which many developed countries see as unfair. Under the programme, the
government heavily subsidises local farmers so they can provide low cost food for the poor.

But, the US and others argue it breaks World Trade Organisation (WTO) rules around subsidy
limits. Dmitry Grozoubinski, a former Australian negotiator at the WTO, thinks they may have a
point. "India is justifying its agricultural subsidies by claiming their poorest citizens can't afford
food, but they're maintaining massive tariff walls that effectively prevent the imports that could
bring prices down.

Risk that its protectionism could backfire

The government banned foreign retailers such as Amazon from striking exclusive deals with
local goods sellers. The move was viewed as a bid by the government to placate small traders. In
response the US said that it planned to end a scheme which allows some goods to enter the US
duty-free.