FREE TRADE VERSUS PROTECTION
Free trade refers to the trade that is free from all artificial barriers to trade like tariffs, quantitative restrictions, exchange controls, etc. Protection, on the other hand, refers to the government policy of protection to the domestic industries from foreign competition. There are a number of arguments for and against both free trade and protection.
Arguments for Free Trade: The important arguments in favor of free trade are as follows:
• Free trade leads to the most economic utilization of the productive resources of the world because under free trade each country will specialize in the production of those goods for which it is best suited and will import from other countries those goods which can be produced domestically only at a comparative disadvantage.
• Under free trade, division of labor occurs on an international scale leading to greater specialization, efficiency and economy in production.
• As there will be intense competition under free trade, the inefficient producers are compelled either to improve their efficiency or to quit.
• Free trade helps to break domestic monopolies and free the consumers from exploitation.
• Free trade benefits the consumers in different ways. It enables them to obtain goods from the cheapest source. Free trade also makes available large varieties of
• Further, under free trade there is no much scope for corruption which is rampant under protection.
ARGUMENTS FOR PROTECTION
• Infant Industry Argument: The infant industry argument advanced by Alexander Hamilton, Frederick List and others assert that a new industry having a potential comparative advantage may not get started in a country unless it is given
temporary protection against foreign competition. An established industry is normally much stronger than an infant one because of the advantageous position of the established industry like its longstanding experience, internal and external economies, resource position, market power etc.
Hence, if the infant is to compete with such a powerful foreign competitor, it will be a competition between unequal and this would result in the ruin of the infant industry. Therefore, if a new industry having a potential comparative advantage is not protected against the competition of an unequally powerful foreign industry, it will be denying the country the chance to develop the industry for which it has sufficient potential. The intention is not to give protection for ever but only for a period to enable the new industry to overcome its teething troubles.
The policy of protection has been well expressed in the following words: “Nurse the baby, protect the
child and free the adult”. The infant industry argument, however, has not been received favorably by some economists. They argue that an infant will always be an infant if it is given protection. Further, it is very difficult for a government to identify an industry that deserves infant industry protection. “The infant industry
argument boils down to a case for the removal of obstacles to the growth of the infants. It does not demonstrate that a tariff is the most efficient means of attaining the objective.
• Diversification Argument: It is necessary to have a diversified industrial structure for an economy to be strong and reasonably self-sufficient. An economy
that depends on a very limited number of industries is subject to many risks. A depression or recession in these industries will seriously affect the economy. A country relying too much on foreign countries runs a number of risks. Changes in political relations and international economic conditions may put the country into
difficulties. Hence, a diversified industrial structure is necessary to maintain stability and acquire strength. It is, therefore, advised to develop a range of industries by according protection to those which require it.
• Improving the Terms of Trade: It is argued that the terms of trade can be
improved by imposing import duty or quota. By imposing tariff the country
expects to obtain larger quantity of imports for a given amount of exports or conversely, to part with a lesser quantity of exports for a given amount of import.
But the terms of trade could be expected to improve only if the foreign supply is inelastic. If the foreign supply is very much elastic a tariff or a quota is unlikely to
improve the terms of trade, there is also the possibility that the foreign countries will retaliate by imposing counter tariffs und quotas. The validity of this argument is therefore, questionable.
• Improving Balance of Payments: This is a very common ground for protection. By restricting imports, a country may try to improve its balance of payments position. The developing countries, especially, may have the problem of foreign
exchange shortage. Hence, it is necessary to control imports so that the limited foreign exchange will be available for importing the necessary items. In developing countries, generally, there is a preference for foreign goods. Under such circumstances it is necessary to control unnecessary imports lest the balance of payments position become critical.
• Anti-Dumping Protection: It is also resorted to as an anti-dumping measure. Dumping, certainly, can do harm to the domestic industry; the relief the consumers get will only be temporary. It is possible that after ruining the domestic industry by dumping, the foreign firms will obtain monopoly powers and exploit
the home market. Sometimes, dumping represents a transmission of the recession abroad to the home country. These factors point out the need to protect domestic industries against dumping.
• Bargaining: It is argued that a country which already has a tariff can use it as a means of bargaining to obtain from other countries lower duties on its exports. It has been pointed out, however, that the bargaining lever, instead of being used to gain tariff concessions from foreign powers, may be employed by others to extract additional protection from the home government.
• Employment Argument Protection: It has been advocated also as a measure to stimulate domestic economy and expand employment opportunities. Restriction of imports will stimulate import competing industries and its spread effects will help the growth of other industries. These, naturally, create more employment
opportunities. This method of employment generation, however, has some problems. First, when we reduce imports from foreign countries employment and
income will shrink abroad and this is likely to lead to a fall in the demand for our exports. Secondly, the foreign countries will be tempted to retaliate in order to protect their employment.
• National Defense: Even if purely economic factors do not justify such a course of action, certain industries will have to be developed domestically due to strategic
reasons. Depending on foreign countries for our defense requirements is rather foolish because factors like change in political relations can do serious damage to a country’s defense interest. Hence, it is advisable to develop defense and other
industries of strategic importance by providing protection if they cannot survive without protection.
• Key Industry Argument: It is also argued that a country should develop its own key industries because the development of other industries and the economy depends a lot on the output of the key industries. Hence, if we do not have our own source of supply of key inputs, we will be placing ourselves at the mercy of
the foreign suppliers. The key industries should therefore be given protection if that is necessary for their growth and survival. The arguments mentioned above have been generally regarded as ‘serious’. There are, however, a number of other
arguments also which have been branded as ‘nonsense’, ‘fallacious’, ‘special interest’ etc.
• Keeping Money at Home: This argument is well expressed in the form of a remark falsely attributed to Abraham Lincoln: “I do not know much about the tariff, but I know this much: When we buy manufactured goods abroad we get the goods and the foreigner gets money. When we buy the manufactured goods at
home we get both the goods and the money”. As Beveridge rightly reacted, this “argument has no merits; the only sensible words in it are the first eight words.” The fact that imports are ultimately paid for by exports clearly shows that the ‘keeping money at home’ argument for protection has no sense in it.
• The Pauper Labor Argument: The essence of this argument is that if in the home country the wage level is substantially high compared to foreign countries, the foreign producers will dominate the home market because the cheap labor will
allow them to sell goods cheaper than the domestic goods and this will affect the interests of the domestic labor. This argument does not recognize the fact that high wages are usually associated with high productivity. Further, labor cost differences may not be a determining factor.
• Size of the Home Market: It is argued that protection will enlarge the market for agricultural products because agriculture derives large benefits not only directly from the protective duties levied on competitive farm products of foreign origin but also, indirectly from the increase in the purchasing power of the workers employed in industries similarly protected. It may be pointed out against this that protection of agriculture will harm the non-agriculturists due to the high prices of agricultural products and the protection of industries will harm agriculturists and other consumers due to high prices encouraged by protection.
• Equalization of Costs of Production: Some protectionists have advocated import duties to equalize the costs of production between foreign and domestic producers and to neutralize any advantage the foreigner may have over the domestic producers in terms of lower taxes, cheaper labor or other costs. This
argument allegedly implies a spirit of ‘fair competition’, not the exclusion of
imports. When, however, by reason of actual cost structure or artificial measures, costs of production become identical, the very basis of international trade disappears. The logical consequence of this pseudo-scientific method is the elimination of trade between nations. Thus, the equalization of costs of production argument for protection is utterly fallacious and is one of the most deceitful ever advanced
in support of protection.
• Strategic Trade Policy: Strategic trade policy which advocates protection and government cooperation to certain high-tech industries in the developed countries
is somewhat similar to the infant industry argument applied to the developing countries. The argument is that government support should be accorded to gain comparative advantage in the high technology industries which are crucial to the
future of the nation such as semiconductors, computers, telecommunications, etc.
It is also argued that State support to certain industries become essential to
prevent market monopolization. For example, outside the former Soviet Union, only three firms build large passenger jets. If European governments do not subsidize the Airbus Industries, only the two American companies, Boeing
Company and Mc-Donnell-Douglas Corporation, will remain.