Free Trade Vs Protectionism Essay

1335 words - 5 pages

Free trade is a policy of imposing no restrictions on the movement of goods and services between countries. It will lead to the most efficient allocation of world resources and higher standards of living for all participating countries. Yet countries in the world see a need for protection. Protectionism is a policy of protecting home industries from foreign competition by the imposition of trade barriers on foreign goods and services. This is because individual governments in the countries are more concerned with achieving national objectives and improving the welfare of the people in their respective countries than with maximizing world output or increasing the welfare of the world.The main arguments used in favour of protection are the "infant industry" argument, the "diversification of industry" argument, the "employment" argument, the "conservation of natural resources" argument, the "key industry" argument, the "self-sufficiency" argument, the need to check unfair competition and the need to correct a persistent deficit in the balance of payments.The "infant industry" argument is probably the most economically sound argument in favour of protection. This argument applies to countries with potential advantages to reap large economies of scale in certain industries which are unable to compete in early stages of their development with established industries in the world. Thus, protection will enable countries, particularly the developing countries, to use their resources more efficiently in the development of industries in which they have potential advantages. Without protection, the infant industry will not survive, and scarce economic resources will have to be diverted from their most efficient use. With protection, the infant industry will have a chance to grow. Once it is large enough, it will be able to produce as cheaply, if not more cheaply, as the foreign rivals and thus will be able to contribute its full share towards maximizing world output.However, it is argued that once protection is given, it is very difficult to withdraw it because "infant industries never grow up". This means that infant industries cling on to protection even when they are fully grown. Open competition may mean lower incomes, and factor inputs employed in the protected industry will naturally resist the removal of the protective cover.Another counter-argument against infant industry protection is the fear that all sorts of industries- even those with no potential- will claim protection on the basis on being an "infant industry".The "diversification of industry" argument states that a nation should allocate its resources in such a way as to produce a variety of goods. Dependence on one or a few industries is dangerous, both politically and economically. Economically, it runs the risk of mass unemployment and economic dislocation if the foreign demand for the good of the industry falls. Politically, it runs the risk of not being able to get essential commodities...

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