FREE TRADE VS PROTECTION
FREE TRADE
Free Trade: Free trade is a policy approach that eliminates trade barriers such as tariffs,
quotas, and subsidies, allowing goods and services to move freely across borders.
Principles:
• Promotes specialization based on comparative advantage.
• Encourages competition and efficiency.
• Enhances access to a variety of goods and services.
The case for free trade:
1. Maximisation of Output: Free trade allows countries to specialize in producing
goods where they have a comparative advantage, maximizing global output.
2. Optimum Utilisation of Resources: Free trade ensures resources like labor, capital,
and raw materials are allocated efficiently across countries based on their
productive capacities.
3. Optimisation of Consumption: Free trade gives consumers access to a wider variety
of goods and services at lower prices, increasing their overall satisfaction
4. High Factor Incomes: By specializing in goods where countries have an advantage,
free trade boosts incomes for factors of production (labor, land, capital).
5. Educative Value: Exposure to international markets teaches countries to adopt
better production methods and improve quality to compete globally.
6. Wide Markets: Free trade opens global markets, allowing businesses to expand
beyond domestic borders and achieve economies of scale.
7. Prevents Monopolies: Free trade introduces competition from international firms,
preventing domestic monopolies from exploiting consumers.
8. Encourages Inventions: Exposure to global competition motivates firms to innovate
and create better products to maintain their competitive edge.
9. Develops Transport and Communications: Increased trade promotes the
development of infrastructure like ports, roads, and communication networks to
facilitate international exchange.
10. Promotes International Co-operation: Interdependence created by free trade fosters
peaceful relations and economic cooperation between countries.
11. Best Policy for Economic Development: Free trade accelerates economic growth by
encouraging specialization, innovation, and foreign investment.
The Case Against Free Trade:
1. Laissez-Faire and Perfect Competition Do Not Exist: Free trade assumes perfect
competition, but in reality, markets are often distorted by monopolies, subsidies, or
unequal power dynamics.
2. One-sided Development: Free trade often leads to the overdevelopment of certain
sectors (e.g., primary goods) at the expense of industrial or technological progress
in less developed countries.
3. Production of Inferior and Harmful Goods: Free trade can lead to the proliferation of
substandard or harmful goods if there are no strict quality controls.
4. Cut-throat Competition and Dumping: Free trade may lead to unfair practices like
dumping, where powerful countries sell goods at very low prices, destroying local
industries in importing nations.
5. Emergence of Multinational Corporations and Monopolies: Multinational
corporations (MNCs) often dominate global markets, using their economic power to
stifle competition and exploit workers in host countries.
6. Exploitation and Colonisation of Countries: Free trade has historically been used as
a tool for economic exploitation, with
7. Economic Dependence: Over-reliance on free trade can make countries dependent
on foreign nations for essential goods, compromising their economic sovereignty.
8. Trade Cycles: Free trade can amplify economic fluctuations, as global markets are
interconnected, making countries vulnerable to international trade cycles.
PROTECTION
Protection: Protectionism involves using measures like tariffs, quotas, and subsidies to
shield domestic industries from foreign competition.
Principles:
• Supports local businesses and employment.
• Encourages self-reliance.
• Reduces dependency on foreign economies.
The arguments for protection
1. Terms of Trade Argument: Protectionism can improve a country’s terms of trade by
imposing tariffs, which increase the price of imports and encourage export growth.
2. Bargaining or Retaliation Arguments: Tariffs or trade restrictions can be used as a
bargaining tool to pressure other countries into reducing their own trade barriers.
3. Anti-dumping Argument: Protection is necessary to prevent foreign firms from
selling goods at artificially low prices to eliminate domestic competition.
4. Diversification Argument: Protectionism encourages the development of a diverse
range of industries, reducing dependence on a few sectors.
5. Infant Industry Argument: New industries need protection from international
competition until they become competitive.
6. Sunset Industries Argument: Protection can help declining industries (sunset
industries) transition without causing significant job losses.
7. Socially Important or Key Industries Argument: Key industries essential for public
welfare, like healthcare or energy, may require protection.
8. Employment Argument: Protectionism can save jobs by shielding domestic
industries from foreign competition.
9. Balance of Payments Argument: Protection can help reduce trade deficits by
limiting imports and encouraging exports.
10. Factor Income Redistribution Argument: Protection can redistribute income toward
specific groups, such as labor or local businesses.
11. Revenue Arguments: Tariffs generate revenue for governments, especially in
developing countries with limited tax bases.
12. Domestic Distortions Argument: Protection can correct market distortions like
overproduction or underemployment caused by unfair foreign competition.
13. Strategic Trade Policy Argument: Protectionism can help develop industries that are
strategically important for national security or global competitiveness.
14. Conservation of National Resources Argument : Export restrictions can conserve
natural resources for domestic use.
15. Pauper Labour Argument: Protection shields domestic workers from unfair
competition with countries that have lower labor standards and wages.
16. Keeping Money at Home Argument: Tariffs prevent money from flowing out of the
country by encouraging the consumption of domestically produced goods.
17. Expanding Home Market Argument: Protection boosts domestic industries, which
can expand the local market for goods and services.
18. Scientific Tariff or Equalising Costs of Production Argument: Tariffs can equalize
production costs between countries with varying wage rates or resource availability.
19. Defence Argument: Protecting industries critical for national defense ensures self-
sufficiency during conflicts.
20. Preservation Argument: Protection helps preserve traditional or cultural industries
that might otherwise disappear due to globalization.
21. Patriotism or Nationalism Argument: Encouraging domestic production fosters a
sense of national pride and self-reliance.
