Free Trade, Protection, Liberalizations And The Main Methods Used By Governments To Protect Domestic Industries.

1272 words - 5 pages

Free trade occurs when goods and services flow freely between economies without governments imposing restrictions in the form of trade barriers. Protection occurs when governments attempt to give domestic producers an artificial cost price advantage over its foreign competitors. Free trade is based on the principle of comparative advantage. In the 19th century the economist David Ricardo attempted to show that countries should specialize in the production of those good /services in which they have a comparative advantage.According to David Riccardo's theory of comparative advantage, country A should specialise in producing machines and country B should specialize in producing food and then each country should engage in international trade and exchange their surpluses. Ricardo attempted to show that the world would achieve an optimum allocation of resources and thus the global output of goods and services would be maximised. This process is known as international specialisation, it allows faster rates of economic growth, but world recessions are increasingly possible as a result of interdependency between nations. Ricardo's theory is unfavourable if globalisation discontinues, eg from war, as countries would not be sufficient in providing all goods and services for themselves.The Ricardian theory of comparative advantage was further developed by the economists Heckshler and Ohlin who attempted to explain the basis for comparative advantage. They claim that it is the level of factor endowment that determines comparative advantage. It is also the supply of these factors that will then determine the cost of the factor. The Heckshler/Ohlin model explains the pattern of trade between Australia and China. Australia has large amounts of high quality, low cost natural resources while China has large amounts of high skilled, low cost labour. Thus Australia specialises in those industries that use little labour but a large amount of natural resources, eg mining, and China specialises in those products that require large amounts of low cost labour, eg TCF. Australia and China then trade their surpluses.There are eight main methods used by the government (govt) to protect domestic industries. They include tariffs, subsides, quota's, embargos, local content rules, anti dumping legislation, export incentives and voluntary export restraints.A main method used by the govt to protect domestic industries is a tariff. A tariff is a tax on an imported product, which increases its price. This gives domestic producers an artificial price advantage. Tariffs allow revenue to be raised by the govt and results in a falling demand for imports.Another method used by the govt to protect domestic industries is subsides. A subsidy is a payment from the govt to domestic produces to give them a cost advantage over foreign producers. It allows domestic producers to place their product on the market at more competitive prices. However, it encourages inefficient industries to...

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