Free trade and Protectionism

Free trade

Absence of goverment intervetion of any kind in international trade, so that trade takes palce without restrictions between individuals, firms or goverments of different countries.

Free Trade Agreement (FTA)

Trade agreement to expand the market for goods and services among the participant countries.

Advantages of free trade

• Greater efficency in production and productivity

• Lower price for consumers

• Greater choice for consumers

• Increased competition

• Acces to larger markets

• More efficient resource allocation

Protectionism

Economic policy that seeks to protect a country's production and jobs by imposing restrictions, limitations or tariffs on goods or services from abroad (imports), making them more expensive to make them less competitive with domestic products.

Advantages of Protectionism

• Protection of new infant industries

• Protecting domestic employment

• National security and strategic reasons

• Avoid over-specialization

• Prevent dumping

• Health and environmental standards

• Protect industries from cheap labor

• Raise goverment revenue

• Correct balance of payments

Disadvantages of Protectionism

• Missalocation of resources

• Higher cost of production

• Reduced efficency

• Higher consumer prices

• Less choice

• Reduced export competitivines

• Retaliation, potentialy leading to trade war

Types of protectionism

• Tarifs

• Quotas

• Subsidies

• Administrative barriers

• Nationalist campaigns

Tariffs

Import tax that increases the price of imported products

Most common form of protectionism.

Purpose:

1. Protection of domestic firms

2. Increase goverment revenue

Winners:

• Domestic producers

• Domestic employment

• Goverment (tariff revenue)

Losers:

• Domestic consumers

• Foreign producers

Tariffs diagram

• Price of the products increases from Pw → Pwt

• Quantity of imported products demanded reduced: Q4 → Q3

• Quantity of national market products increases: Q1 → Q2

• Actual import sales: Q2 - Q3

Subsidies

Aid from the government to stimulate a good. It is used to protect domestic production from imports.

Subsidy allows producers to increase their production since its cost of production are low.

Winners:

• Local producers

This gain does not affect the consumers.

Affected:

• Foreign producers

Subsidies diagram

• With world price at Pw, producer can sell more from Q1 → Q2

• Q2 - Q3 is fullfilled by imports

Quotas

Non-tariff barrier.

Quantitative restriction to trade through which a limit is set on the total amount of imports of a good allowed into the country for a given period of time.

Quotas diagram

• The consumers will only be able to buy imported products from Q1 - Q2

• In Q2 the national supply has a shift to the right → national prices increase

• Q3: National consumers can sell their products at Pq (consumers lose)

• Product supply decreases from Q4 → Q3. Foreign producers can charge up to Pq to compensate the loss.

Non-tariff barriers

Mechanism that allows the application

of restrictions to international trade.

Main Non-tariff barriers

• Licenses

• Sanctions

• Embargos

Licenses

This mechanism allows only certain companies to import certain commercial goods. The rest of the goods destined for trade are restricted in the rest of the country.

Sanctions

• Increase bureaucracy to make international trade more difficult.

• Impose new administrative measures.

• Minimum price of import.

• Standardization of products.

• Sanitary and safety rules.

Embargos

Actions taken by any country to prohibit another country from trading with any type of service or good determined.