Trade policies

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Trade policies

  1. 1. TRADE POLICIES: Free trade vs. protectionIntroduction:The commercial policy to be followed by a country with regard to its foreign tradehas been the subject of heated controversy centering on whether a country shouldfollow a policy of free trade or protection. A number of arguments have beenadvanced for and against both the policies. We shall briefly discuss them in thefollowing sections.Types of trade policies:1. Free trade policy2. Protectionist trade policyFree Trade PolicyPolicy of non-intervention by government in foreign trade is referred to as “Freetrade”. Free trade policy implies absence of any artificial restrictions on or obstacleto the freedom of trade of a country with other nations. According to Adam Smith, The term “free trade” is used to denote “that systemof commercial policy which draws no distinction between domestic and foreigncommodities and, therefore, neither imposes additional burdens on the latter, norgrants any special favor to the former”. In other words, free trade implies completefreedom of international exchange. Under such a policy there are no barriers to themovement of goods among countries and exchange can take its perfectly naturalcourse. Classical economists like Adam Smith, Ricardo and others pleaded forfree trade for the welfare of the world.ADVANTAGES OF FREE TRADE POLICY 1. Comparative cost advantage: Free trade is the natural outcome of the comparative costs advantage. It permits an allocation of resources, and
  2. 2. manpower in accordance with the principle of comparative advantage, which is just an extension of the principle of division of labour.„‟the fact of free trade establishes an overwhelming presumption that thecommodities obtained from abroad in exchange for export are so obtained atlower cost than which the domestic production of their equivalents wouldentail. If this were not the case, they would not be imported, even under freetrade‟‟ says Jacob Viner It has been maintained that the gain from free international trade would be thelargest due to international specification based on comparative advantage. Freetrade leads to the most efficient conduct of economic affairs. In a plea for freetrade, they also said that even if some countries do not follow the policy of freetrade, an industrial country should follow it unilaterally and it will gain thereby.2. More factor earnings: Under free trade, factors of production will also be able to earn more, as they will be employed for better use. Hence, wages, interest and rent will be higher under free trade than otherwise.3. Cheaper imports: Free trade procures import as cheap rates. It seems to be an attractive argument in favor of trade at least from the consumer‟s point of view. However, it ignores the question of employment and the interests of producers in the importing country. Here it has been pointed out that under free trade, when consumers gain through lower prices; producers also gain as the factors of production are directed to more gainful and specialized production which gives better earnings.4. Enlarged markets: free trade widens the size of the market as a result of which greater specification and a more complex division of labour become possible. Thus brings about optimum production with costs reduced everywhere, benefiting the world as a whole.5. Competition: Free trade policy encourages competition from abroad which induces domestic producers to become more alert and improve their efficiency.6. Restricted exploitation: free trade prevents growth of domestic monopolies and consumers‟ exploitation due to competition from abroad.7. Greater welfare: Free trade permits large varieties of consumption goods and improves consumers‟ welfare.
  3. 3. Thus free trade is the best commercial policy.DISADVANTAGES OF FREE TRADE POLICY1. Unrealistic Policy:Free trade policy is based on the assumption of laissez-faire or government non-in-tervention. Its success also requires the pre-condition of perfect competition.However, such conditions are unrealistic and do not exist in the actual world.2. Non-Cooperation of Countries:Free trade policy works smoothly if all the countries cooperate with each other andfollow this policy. If some countries decide to gain more by imposing importrestrictions, the system of free trade cannot work.3. Unbalanced Development:Free trade and the resultant international specialization lead to unbalanceddevelopment of national economy. Under this system, only those sectors aredeveloped in which the country has a comparative advantage. Other sectors remainundeveloped. This results in lop-sided development.4. Dumping:Free trade may lead to cutthroat competition and dumping. Under dumping, goodsarc sold at very cheap rates and even below their cost of production in order tocapture the foreign markets.5. Competition: competition induced under free trade is unfair or unhealthy.Backward countries cannot compete with advanced countries.6. Unequal distribution: gains of trade are not equally distributed under free tradedue to unequal state of development of different countries. PROTECTIONIST TRADE POLICYProtectionism is the economic policy of restraining trade between states throughmethods such as tariffs imported goods, restrictive quotas, and a variety of other
  4. 4. government regulations designed to allow (according to proponents) "faircompetition" between imports and goods and services produced domestically.[1]This policy contrasts with free trade, where government barriers to trade are keptto a minimum. In recent years, it has become closely aligned with anti-globalization. The term is mostly used in the context of economics,where protectionism refers to policies or doctrines which protect businesses andworkers within a country by restricting or regulating trade with foreign nations.[2]Trade barriers: 1.Tariffs - taxes levied basically on imported goods. They are imposed as an attempt to raise foreign exchange revenue and increase the welfare at the expense of other nations. 2.Non tariff barriers -Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but arenot in the usual form of a tariff. Some common examples of NTBs are anti-dumping measures and countervailing duties, which, although they are called "non-tariff" barriers, have the effect of tariffs once they are enacted.Their use has risen sharply after the WTO rules led to a very significant reductionin tariff use. Some non-tariff trade barriers are expressly permitted in very limitedcircumstances, when they are deemed necessary to protect health, safety, orsanitation, or to protect depletable natural resources. In other forms, they arecriticized as a means to evade free trade rules such as those of the World TradeOrganization (WTO), the European Union (EU), or North American Free TradeAgreement (NAFTA) that restrict the use of tariffs.Some of non-tariff barriers are not directly related to foreign economic regulations,but nevertheless they have a significant impact on foreign-economic activity andforeign trade between countries.Trade between countries is referred to trade in goods, services and factors ofproduction. Non-tariff barriers to trade include import quotas, special licenses,unreasonable standards for the quality of goods, bureaucratic delays at customs,export restrictions, limiting the activities of state trading, exportsubsidies, countervailing duties, technical barriers to trade, sanitary and phyto-sanitary measures, rules of origin, etc. Sometimes in this list they includemacroeconomic measures affecting trade.
  5. 5. FREE TRADE vs. PROTECTION Freee trade: A trade policy of placing no restrictions on the movement of goods between countries is known as the policy of Free Trade. Such a policy permits the flow of international commerce in its natural 1. It permits an allocation of resources and manpower in accordance with the principle of comparative advantage, which is just an extension of the principle of division of labour. Because of natural and other facilities, each country is suited for the production of some particular commodities environment, free of artificial impediments.2. Under free trade, factors of production also will be able to earn more, as they will be employed forbetter use. Hence, wages, interest and rent will be higher under free trade than otherwise.3. Free trade procures imports at cheap rate. It seems to be an attractive argument in favor of free trade atleast from the consumers point of view. However, it ignores the question of employment and the interestsof producers in the importing country. Here it has been pointed out that under free trade, whenconsumers gain through lower price, producers also gain as the factors of production are directed to moregainful and specialized production which gives better earnings.4. Free trade widens the size of the market as a result of which greater specialization and a more complexdivision of labour become possible. This brings about optimum production with costs reducedeverywhere, benefiting the world as a whole. Restrictions on free trade reduce the scope of specializationand in consequence there is a reduction of the total world supply, thereby, making the world as a whole somuch the poorer economically.5. Free trade also widens the area of competition as a result of which the industrial techniques of thetrading countries tend to be improved. Home producers are spurred by foreign competition to becomemore efficient and to adopt quickly any improvement in methods of production. In this way free trade hasan educative effect.6. Another incidental advantage of free trade is that it prevents, or at least makes more difficult, theestablishment of injurious monopolies by preserving competition.VS.Protection :Protection refers to the foreign trade policy of encouraging home industries by paying bounties (orgiving subsidies) to domestic producers, or more usually by imposing customs duties on foreignproducts.The term protection usually carries in a very loose sense the connotation of a tariff on imports; but itmay refer to any policy that raises the price of import substitutes and safeguards the interest ofdomestic producers against foreign competition.Tariff system, i.e., customs duties, is an important and most common method of protection. By tariffbarriers we mean only those taxes which are intended to restrict international trade.
  6. 6. Protection is an established creed of modern trade policy. Yet it remains to be examined whether,protection is a healthy policy leading to an economic millennium or a policy abounding in hiddendangers.

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