HIMACHAL PRADESH NATIONAL

LAW UNIVERSITY
2021-22

ECONOMICS ASSIGNMENT
FREE TRADE vs PROTECTION

Submitted to: Mr. Digvijay Singh Katoch Submitted by: Ayush Pratap
Singh
B.B.A. LL.B. (SEM-III)
Enrollment No- 1120202109
 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to Mr. Digvijay Singh Katoch for his invaluable
guidance and constant encouragement during the course of this training. The successful
completion of this project was entirely possible due to his excellent knowledge in the field of
Economics of International Trade, which was imparted with the help of online study periods and
detailed discussions.

I would also like to thank my classmates who rendered their assistance directly or indirectly to
make this project a success.I am also thankful to the library department for all the resources
provided by them.
 INDEX

1. INTRODUCTION
2. TYPES OF TRADE POLICIES
3. FORMS OF TRADE POLICIES
4. FREE TRADE AND FREE TRADE AGREEMENTS
4.1 PROS OF FREE TRADE
4.2 CONS OF FREE TRADE

5. TRADE PROTECTIONISM
5.1 HOW PROTECTIONISM WORKS
5.2 ADVANTAGES AND DISADVANTAGES OF
PROTECTIONISM

6. THE ROLE OF WTO IN TRADE AGREEMENTS

7. CASE STUDY-17
 INTRODUCTION

UNDERSTANDING TRADE POLICIES

Trade policy can be defined as goals, rules, standards, and regulations that are involved in the
trade between countries. These policies are particular to a specific country and are formed by its
public officials. A country’s trade policy covers taxes imposed on inspection regulations, import
and export, and tariffs and quotas.

Trade policies, in general, define the standards, goals, and rules and regulations of trade
agreements between countries. Such policies are specific to each individual country, being
determined by the country’s public officials. In some cases, they are employed to protect and
promote local businesses. They can also be set up to promote the importing of certain goods,
while having an embargo on others.

National trade policy is the formulation of each country’s policies on trade. They are
implemented to accommodate the people living in the country and ensure their best interests.
These policies can also reflect embargoes and other trade barriers that are in place. Bilateral trade
policies are formed between 2 nations to regulate business and trade relations between them.
Naturally, the policy must be beneficial to both parties for the most effective outcome. To form
such a policy, both countries’ national trade policies are considered to find a golden midway that
will work for both involved parties.

The international trade policies are determined by international economic organisations,

including the Organisation for Economic Cooperation and Development(OECD), the World
Trade Organisation(WTO), and the International Monetary Fund(IMF). These organisations
define the international trade policies to uphold the best interests for developed and developing
countries’ economies and financial growth. Therefore, these policies are aimed to stimulate
international and cross-border trade.
 TYPES OF TRADE POLICIES

Trade policy sets requirements, priorities, guidelines, and regulations for part of the world-to-
country exchange. Such measures are country-specific and developed by their leaders, and A
country's international strategy requires import and export duties, enforcement rules, tariffs, and
quotas.

The main principle of government regulation over international markets is to combine two
separate forms of foreign trade policy.

- Liberalization (free trade)

- Protectionism

Constituents of Trade Policy

A foreign strategy usually relies on the following global trade parameters:

Tariffs

Each government can charge imported and exported products. Few nations impose high product
tariffs to defend their local economies. Substantial import taxes pump up the costs of
manufactured commodities on local markets, creating greater competition for domestic items.

Trade barriers
They are government-imposed limits on selling a specific commodity or country. Two of the
most prominent trade restrictions are taxes, penalties, exemptions, embargoes, and quotas.

Safety

This determining factor guarantees the nation imports only high-quality goods. Local authorities
will establish rules for testing to ensure that the imported commodity conforms to health and
quality requirements.

Forms of Trade Policies

Trade policies may adopt differing dimensions and complexity based on the number of
concerned parties. Check out the following types of trade policies,

● National Foreign Policy

Each country interprets this policy to protect its economy and people's best interests. This
approach is aligned with a regional international strategy.

● Bilateral Trade Policy

This agreement is established between two countries to govern trade and business ties.
Both countries ' national exchange strategies and their trade deal agreements are regarded
in constructing respective foreign policy.

● International Trade Policy

Foreign economic bodies such as the Organization for Economic Co-operation and
Growth (OECD), the World Trade Organization (WTO) and the International Monetary
Fund (IMF) describe the principles of international trade policy. Policies protect
established and emerging nations ' best interests.
 FREE TRADE & FREE TRADE
AGREEMENTS

Free Trade, also called laissez-faire, a policy by which a government does not discriminate
against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports).

A free-trade policy does not necessarily imply, however, that a country abandons all control and
taxation of imports and exports.

The theoretical case for free trade is based on Adam Smith’s argument that the division of labour
among countries leads to specialization, greater efficiency, and higher aggregate production.
From the point of view of a single country there may be practical advantages in trade restriction,
particularly if the country is the main buyer or seller of a commodity. In practice, however, the
protection of local industries may prove advantageous only to a small minority of the population,
and it could be disadvantageous to the rest.

Historically, openness to free trade substantially increased from 1815 to the outbreak of World
War I. Trade openness increased again during the 1920s, but collapsed (in particular in Europe
and North America) during the Great Depression. Trade openness increased substantially again
from the 1950s onwards . Economists and economic historians contend that current levels of
trade openness are the highest they have ever been.
Economists are generally supportive of free trade. There is a broad consensus among economists
that protectionism has a negative effect on economic growth and economic welfare while free
trade and the reduction of trade barriers has a positive effect on economic growth and economic
stability. However, in the short run, liberalization of trade can cause significant and unequally
distributed losses and the economic dislocation of workers in import-competing sectors
 Pros of Free Trade:

Free trade agreements are designed to increase trade between two or more countries. Increased
international trade has the following six main advantages:

1. Increased Economic Growth: For Example;The U.S. International Trade

Commission estimated that NAFTA could increase U.S. economic growth by 0.1%-
0.5% a year.
2. More Dynamic Business Climate: Without free trade agreements, countries often
protected their domestic industries and businesses. This protection often made them
stagnant and non-competitive on the global market. With the protection removed, they
became motivated to become true global competitors.
3. Lower Government Spending: Many governments subsidize local industries. After
the trade agreement removes subsidies, those funds can be put to better use.
4. Foreign Direct Investment: Investors will flock to the country. This adds capital to
expand local industries and boost domestic businesses. It also brings in U.S. dollars to
many formerly isolated countries.
5. Expertise: Global companies have more expertise than domestic companies to
develop local resources. That's especially true in mining, oil drilling, and
manufacturing. Free trade agreements allow global firms access to these business
opportunities. When the multinationals partner with local firms to develop the
resources, they train them on the best practices. That gives local firms access to these
new methods.
6. Technology Transfer: Local companies also receive access to the latest technologies
from their multinational partners. As local economies grow, so do job opportunities.
Multinational companies provide job training to local employees.
 Cons of Free Trade:

The biggest criticism of free trade agreements is that they are responsible for job outsourcing.

1. Increased Job Outsourcing: This happens due to reducing tariffs on imports allowing
companies to expand to other countries. Without tariffs, imports from countries with a
low cost of living cost less. It makes it difficult for U.S. companies in those same
industries to compete, so they may reduce their workforce. Many U.S. manufacturing
industries did, in fact, lay off workers as a result of NAFTA. One of the biggest criticisms
of NAFTA is that it sent jobs to Mexico.
2. Theft of Intellectual Property: Many developing countries don't have laws to protect
patents, inventions, and new processes. The laws they do have aren't always strictly
enforced. As a result, corporations often have their ideas stolen. They must then compete
with lower-priced domestic knock-offs.
3. Crowd out Domestic Industries: Many emerging markets are traditional economies that
rely on farming for most employment. These small family farms can't compete with
subsidized agri-businesses in the developed countries. As a result, they lose their farms
and must look for work in the cities. This aggravates unemployment, crime, and poverty.
4. Poor Working Conditions: Multi-national companies may outsource jobs to emerging
market countries without adequate labor protections. As a result, women and children are
often subjected to grueling factory jobs in sub-standard conditions.
5. Degradation of Natural Resources: Emerging market countries often don’t have many
environmental protections. Free trade leads to depletion of timber, minerals, and other
natural resources. Deforestation and strip-mining reduce their jungles and fields to
wastelands.
6. Destruction of Native Cultures: As development moves into isolated areas, indigenous
cultures can be destroyed. Local peoples are uprooted. Many suffer disease and death
when their resources are polluted.
7. Reduced Tax Revenue: Many smaller countries struggle to replace revenue lost from
import tariffs and fees.
 Trade Protectionism
Trade protectionism is a stance that some countries adopt to protect their domestic industries
from foreign competition. It may work in the short run to bolster domestic production and
business, but in the long run, trade protectionism can make a country and its industries less
competitive in international trade.

According to the Corporate Finance Institute, trade protectionism can be politically motivated
and lead to trade isolationism. The four primary tools used in trade protectionism are tariffs,
subsidies, quotas, and currency manipulation.

Definition and Examples of Trade Protectionism

Trade protectionism is a measured and purposeful move by a country to control imports while
promoting exports. It is done in an effort to promote the economy of the country above all other
economies.

For example, if a U.S. auto company were to move all of its operations out of foreign countries
to the U.S., cars made in the U.S. would become more expensive. If tariffs were put on foreign
cars, this move would make it so the cars made in the U.S. weren't any more expensive than
those being exported from other countries.

How Trade Protectionism Works

The most common protectionist strategy is to enact tariffs that tax imports. That immediately
raises the price of imported goods. They become less competitive when compared to local goods.
This method works best for countries with a lot of imports, such as the U.S.
The Use of Subsidies
Governments also frequently subsidize local industries to help them compete in the global
market. Subsidies come in the form of tax credits or direct payments. Some of the most
commonly used subsidies are granted to farms, which allows farmers to lower the price of the
food they produce. In turn, these subsidies make the products affordable for the consumer while
still allowing the producer to turn a profit.

There are instances when subsidies can cause problems. For instance, the Agricultural
Adjustment Act of 1933 allowed the government to pay farmers not to grow crops or livestock.

The government wanted to control supply and increase prices. The act also enabled farmers the
chance to let their fields rest and regain nutrients due to overproduction. In this case, the
subsidies helped the agriculture industry but raised food costs during the Depression and hurt
consumers.

Using Import Quotas and Currency Manipulation

A third method is to impose quotas on imported goods. This method is more effective than the
first two. No matter how low a foreign country sets the price through subsidies, it can’t ship
more goods.

Currency manipulation is a deliberate attempt by a country to lower its currency value. While it
can make exports cheaper and more competitive in the short term, currency manipulation can
also result in retaliation by other countries and start a currency war. One way countries can lower
their currency's value is through a fixed exchange rate. Another way to manipulate currency is by
creating so much national debt that the currency becomes less valuable.
 Advantages and Disadvantages of Trade
Protectionism

Advantages

● Protects a country's new industries from foreign competition

● Temporarily creates jobs

Disadvantages

● Companies without competition decline in quality

● Leads to the outsourcing of jobs
● Slows economic growth

Advantages Explained:

Protects a country's new industries from foreign competition: If a country is trying

to grow strong in a new industry, tariffs will protect it from foreign competitors. That
gives the new industry’s companies time to develop their competitive advantages.

Temporarily creates jobs for domestic workers: The protection of tariffs, quotas, or
subsidies allows domestic companies to hire locally. This benefit ends once other
countries retaliate by erecting protectionism.
Disadvantages Explained:

Companies without competition decline in quality: In the long term, trade

protectionism weakens industry. Without competition, companies do not need to
innovate. Eventually, the domestic product will decline in quality and be more expensive
than what foreign competitors produce.

Leads to outsourcing of jobs: Job outsourcing is a result of declining U.S.

competitiveness. Competition has declined from decades of the U.S. not investing in
education. This failure is particularly true for high-tech, engineering, and science.
Increased trade opens new markets for businesses to sell their products. The Peterson
Institute for International Economics estimates that ending all trade barriers would
increase U.S. income by $500 billion.

Slows economic growth: Protectionism causes more layoffs, not fewer. If the U.S. closes
its borders to trade, other countries will do the same. These actions could cause layoffs
among the 12 million U.S. workers who owe their jobs to exports.

The Role of the WTO in Trade Agreements

Once agreements move beyond the regional level, they need help. The World Trade
Organization steps in at that point. This international body helps negotiate and enforce global
trade agreements.
The WTO currently enforces the General Agreement on Tariffs and Trade.

The world almost received greater free trade from the next round, known as the Doha Round
Trade Agreement. If successful, Doha would have reduced tariffs across the board for all WTO
members.

Doha round talks were on and off for over a decade, and the reasons for their failure are
complex.Many of the issues hinged on the two most powerful economies—the U.S. and the EU.
Both resisted lowering farm subsidies, which would have made their food export prices lower
than those in many emerging market countries. Low food prices would have put many local
farmers out of business. The U.S. and EU refusals to cut subsidies, among other issues, doomed
the Doha round.

The failure of Doha allowed China to gain a global trade foothold. It has signed bilateral trade
agreements with dozens of countries in Africa, Asia, and Latin America. Chinese companies
receive rights to develop the country's oil and other commodities. In return, China provides loans
and technical or business support.

Effects of Trade Agreements

There are pros and cons to trade agreements. By removing tariffs, they lower prices of imports
and consumers benefit. However, some domestic industries suffer. They can't compete with
countries that have a lower standard of living. As a result, they can go out of business and their
employees suffer. Trade agreements often force a trade-off between companies and consumers.

On the other hand, some domestic industries benefit. They find new markets for their tariff-free
products. Those industries grow and hire more workers. These trade-offs are the subject of
endless debate among economists.
 CASE STUDY-17

Q: With respect to any economic sector in India, how can we say that free trade is
a good substitute for national antitrust or anti monopoly policy?

A: When unfastened change takes place among countries it lets in many agencies to amplify as a
result achieving a big wide variety of clients which creates greater income, sales and as a end
result the general company earnings is likewise boosted. The unemployment is likewise reduced
due to the growing income which results in greater hiring with the aid of using the businesses. A
big-scale manufacturing additionally will become feasible due to the income. Small scale has one
downside that they're usually much less efficient, that is additionally conquered with the aid of
using the big scale manufacturing. This method ends in large company income. The groups
additionally amplify their businesses as a result once they make investments withinside the
businesses in addition they increase the financial system of the kingdom. It creates pleasant
relationships with different countries due to the fact one kingdom profits from the change with
the opposite kingdom, it obviously desires to make its friendship bigger.

When unfastened change is permitted to move on for a protracted time, the big agencies make it
not possible for the small agencies to live to tell the tale withinside the marketplace. This creates
an unfair opposition however the hassle of anti monopoly guidelines is larger than this as can be
proven withinside the following couple of lines.

Free change has a few troubles however continues to be higher than antitrust guidelines due to
the subsequent reasons. The first difficulty is created due to the overall language utilization of
the antitrust legal guidelines. Like in India conserving a “domination role” is used withinside the
legal guidelines while the hassle lies with the abuse of the dominant role and now no longer with
the dominant role itself. This is simply one instance of this. The even larger hassle is the political
strain. Generally it occurs that the enterprise conserving the monopoly role is unpopular
withinside the kingdom. Politicians forming part of the kingdom can be tempted with this and
positioned political strain to make legal guidelines and rate the enterprise for this. These kinds of
effects may originate from the media houses. The citizens who're uninformed may strain the
authorities to take such movements and the institution is lobbyists. The fitness of the financial
system can also additionally get worse due to the charging of the enterprise in which the
enterprise is pretty worthwhile and contributes in a extensive way to the kingdom`s financial
system.

India has pretty robust antitrust legal guidelines for a growing kingdom. This locations India at a
downside whilst as compared to the marketplace region withinside the world. The overseas
businesses also are charged below this.

The one primary precept in the back of the operating of the antitrust legal guidelines is the
opposition going for walks in an unrestricted way. This locations a big wide variety of businesses
in a dropping role and some gamers become winners who are seeking for a dominant role
because the businesses also are now no longer allowed to shape groups. This is due to the fact
whilst some businesses attempt to shape an institution, the anti monopoly coverage works in one
of these ways that they accurately account for the marketplace imbalances with the aid of
charging them below the legal guidelines. This additionally every now and then prevents
harmonious operating of the marketplace. The regulation works with the aid of making the
dominant businesses combat for the marketplace region in an aggressive environment. The
businesses in an aggressive marketplace region without pleasant relationships attempt to trap
clients with the aid of charging a far decreased charge as a result developing decreased basic
income and making the entire financial system inefficient. This is particularly authentic for the
telecommunications area in India in which a few of the businesses engaged withinside the
opposition and didn't live to tell the tale
Q: Discuss the facts and decision in any case before the WTO or GATT dispute
settlement panel where Quota restrictions were contested?

A:

CHINA RARE EARTH CASES

FACTS

The disagreement occurred when China imposed export quotas and levies on rare earths in
various forms, including tungsten and molybdenum. In the case of export quotas, a complaint
was also filed that directly challenged the allocation of minerals and the allocation of minerals
through the use of export permits.

CHALLENGES

The US, Japan and European Union were the complainants in this case which made an argument
regarding the quotas and import duties which included the allocation and administration which
was described as inconsistent with as according to the commitment made as under the China’s
Accession Protocol and under the article XI:1 of the GATT.

China made an argument in its defense that under the article XX(b) and (g) which include some
exceptions justify the quotas and export duties which were used by China. This means that
China’s commitment was violated as according to the Accession Protocol of the GATT.

PANEL REPORT ON THE ISSUE OF THE VIOLATION OF THE ARTICLE XI OF

THE GATT

When the panel examined the defense that was made by China that is under the article XX(g)
and also saw the use of XI which includes the quantitative restrictions. The panel found that the
use of export quotas was not justifiable as was done by the government which was according to
China done for the preservation and conservation of China’s natural resources. China contested
that the step taken was not discriminatory in nature, or arbitrary and neither was it unjustifiable
in any way. However, the panel gave its observation that the plea taken by China does not meet
the required standards and it failed to show that the export quota applied in 2012 on the rare
earths was free of arbitrariness, unjust discrimination. The panel labeled the move by China as
disguised which in reality created a restriction on international trade. These all reasons led to the
conclusion that the export quota in practice by China on the rare earths was violative of the
norms set by the article XI of the GATT 1994 and also of the working party report by China.
Further, the export quota on rare earths could not be justified under the article XX of the GATT
1994.

REASON FOR THE IMPOSITION OF VER BY CHINA ON THESE MINERALS

Modern sophisticated electronics like the computers, smart phones, cars, magnetic devices and
turbines all require rare earth metals for their manufacturing. Over ninety percent of the world’s
total rare earth metal supply is produced by China which is used by industries globally. The near
monopoly status of China was misused by it in the past. As in the year 2010, the country reduced
the export quotas by over forty percent which caused the prices to skyrocket.
Q: Explain the impact of using tariffs over quotas in the agricultural sector of
India?

A: Tariffs put a levy on all products crossing the border, with the result that the country imposing
the tariff boosts the price of agricultural products, like in this case. As a result, the tariff imposed
by India in this scenario raises goods prices. When prices rise, it affects supplies because farmers
raise output and consumers buy less, lowering demand. Tariffs are used by countries to boost
native industry. To boost its indigenous agricultural sector, India imposes tariffs.

The most common justification for tariffs imposed by India and other countries is to safeguard
indigenous industries from rising competition.

India with high rate poverty among farmers has created the policy of imposing tariffs to not
weaken the already weak sector. As the overall production of the sector is high but the farmers
suffer from low per capita income.

In addition, the mercantilist principle holds true in this case because the country wants to export
more than it imports in order to grow its prosperity. Tariffs serve as a protective tool that boosts
the country's wealth. Although current economists have debunked the myth that free trade
benefits the global economy, it may not be helpful to a few countries in specific circumstances.

The Indian farmers have benefited greatly from tariffs since they have effectively reduced
competition, which is why they continue to campaign vigorously for tariff protection.

When the price of agricultural products rises, the price rises for a large number of consumers,
producing a careless rise in the price. On the other hand, a smaller number of people profit from
the rise, and they continue to benefit from it. This indicates that the average producer stands to
benefit more from tariffs than the average consumer.

The use of farm programmes, which include the use of tariffs, is considered as a desirable
strategy in India because there are still worries about farmer income, and non-market benefits
such as a better agricultural landscape are countered by the use of tariffs. The domestic
agricultural policy of India has the use of tariffs as the main policy decision.
If the government uses tariffs instead of quotas like in the agricultural sector in India then it also
generates revenue immediately and automatically provided the tariff is not prohibitive in nature.
But depending upon how the quota system is applied, it may sometimes not be able to generate
revenue. The quota is able to generate income when the quota tickets are sold by the
government; however, that is not so in the case of first come, first serve basis quota
administration.

Although both of the methods involve some form of collection, identification of product and
processing of fees. Quota additionally requires auctioning or disbursing of tickets. The
economists are in general consensus that tariff collection is cheaper. India diligently follows the
laws made by the General Agreement on Tariffs and Trade(GATT), it prefers the tariffs rather
than quotas as was written in the founding principle. Tariffs pave the way for a more flexible
market and are regarded as less protective in the long run. While the quota makes it difficult to
measure as to how much lower it is than the free trade import level. While the tariff protection
shows the exact value of the protection that is provided, especially the ad valorem tariff.

Talking in the international terms, the member countries of the World Trade Organization
(WTO) signed an agreement in the Uruguay round which restricted the use of quotas and
specially in the agricultural industries. The effect of the quotas in the market is studied then a
tariff rate of similar effect is applied. This process is called tariffication. Only amendments in the
domestic policies can change the scenario when tariff protection is the core of the agricultural
policy of the nation. The programs which raise the domestic prices above the world prices have
proven to be unsustainable when more imports are made. Although the tariffs have proven to be
successful in increasing the protection to producers, they cause more problems for the consumer
by raising prices and creating distortions than the situation when direct support is provided to the
producers. Reason why India uses tariffs is because it is a developing nation and to support the
domestic industry an application of tariffs is needed to achieve the objectives. It is relatively easy
to tax goods when compared to other taxes like income taxes and sales tax thus making tariffs a
ludicrous source of income. India also has managed to maintain a high balance of payments
especially after the balance of payments crisis. These all reasons make applying tariffs a more
suitable choice for developing countries like India.
 BIBLIOGRAPHY

1) Thebalance.com
2) Investopedia.com
3) Wikipedia.com
4) International Economics by Dominick Salvatore