Economics: Protectionism and Free Trade

Free Trade

Free trade means that countries can import and export goods without any tariff or other non-tariff barriers to trade

Advantages of Free Trade

• Greater competition between firms, therefore firms need to be more efficient

• Greater amount of choice for consumers which can lead to an increase in the standard of living

• Firms have access to larger markers and can benefit from economies of scale i.e lower average unit costs

Disadvantages of Free Trade

• Infant or sunset industries may collapse, due to fierce competition

• Unemployment could increase

• It will be difficult to prevent dumping

Protectionism

Protectionism is an economic policy that restricts trade between countries through tariffs, quotas, and other regulations to protect domestic industries from foreign competition.

Import Tariff/s

These are duties or taxes levied on imported products by the government. Tariffs can reduce the demand for imported goods as the price of imports increase

Import quotas

The government limits the number of goods or services that can be imported into the country

Subsidies

Subsidising local industries to compete with imported products by reducing the cost of production. Export subsidies increase exports and restrict imports by making local products artificially cheaper

Other non-tariff

Non-tariff barriers include overly complicated documentation, licensing requirements or health and safety regulations

Reasons for protectionism

• Protection of specific industries

• Employment

• Prevention of dumping

• Encourage economic growth

• Diversifying the industrial base and striving for national independence

Protection of specific industries

• Newly established industries find it very difficult to compete with the cheaper costs of production of long-established firms. The only way to protect these industries is through trade restrictions. This argument for trade restrictions is also known as the infant industry