Trade policy have always been integral part of economic and political policy of every country. Majorly there are two types of trade policies free trade policy and protectionist trade policy. Trade policy could differ from country to country as one knows the economic and social condition tend to differ across countries. WTO which came into existence in 1995 have pursued free trade policy as its one of the main objectives. Tariffs are one of the oldest and popular method used by trading countries to promote and discourage flow of goods among them. Let us discuss each case of trade policy with its pros and cons.
Free Trade Policy
Free trade could be understood as synonymous of liberal trade. Classical economist like David Ricardo, J.S. Mill were the among those who advocated case of free trade. Trade with less or minimum restriction can be termed as free trade policy. prime objective of this case is to promote free flow of goods and services among countries.
Maximization of output:
When flow of goods and services are free and less restrictive producers are encouraged to produce more and supply more in the market. Free trade establish trade on the ground of comparative cost advantage- country will produce good in which they have advantage of least cost or good which they can produce in optimum manner. Therefore, all country will specialize in their area which leads to maximum production of goods and services.
Free trade policy makes a country to specialise in their respective area and work on the concept of division of labour. therefore, resources are employed in best manner which avoid wastage. This kind of allocation ensure optimum utilisation of available resources by that particular country.
Free trade is a win -win situation for producer as well as consumer. Due to free flow in trade large variety of goods and services are available in the market. Consumers standard of living and real income shows improvement because now consumers are able to get better quality product at reasonable rate or price.
According to classical economist free trade is ideal to promote economic development. lesser restriction in trade ensure absence of demand and supply mismatch. Specialization by countries leads to maximum level of production which generate employment and improve income level of people.
Free trade prevents monopoly by giving all the producer equal opportunity to participate in the market and secure benefit from the same.it also encourages fair competition among nation. Goods are produced at optimum level which keeps the cost of production low and are provided at reasonable rate. Export and import are priced under perfect competition hence it prevents formation on monopoly.
Less gain for developing
Free trade policy benefits more to developed nation on the cost of developing nations. There have been cases where adoption of free trade has led to exploitation and colonization of developing nations. Looking at this striking demerit many countries have opted for protectionist policy to keep themselves out of the clutches of exploitation.
Particular sector growth:
Here countries focus mainly on the areas in which they can do wonder or in which they could make most profit. While doing so country neglect other sectors and areas and in many cases country dependent on other even in key industries. Increase in dependency make country more vulnerable to shocks and disturbance in another country.
Specialisation sometimes may pave way for monopoly. Monopoly could get created at both level domestic as well as international level. Majority of the time monopoly distort and hamper consumption process.
Many of the developed country opt for dumping wherein developed countries dump market of developing countries with large amount of good at very low price. Dumping affects local market in negative market by reducing drastically demand for domestic goods.
Protectionist Trade Policy
Looking at the drawbacks of the free trade policy many countries have praised protectionist policy. Protection and promotion of domestic industries is the centre theme of protectionist policy. Conducive environment is made by the country for domestic producer by imposing tariffs and non-tariff barriers. Another way of promoting domestic industries is by providing subsidies which enable them to compete with foreign competitors.
It is said that infant or new domestic cannot compete with the MNCs and companies which have stronger roots hence it needs to be protected. By imposing tariffs and other restriction on foreign goods it is made sure that we protect the interest of domestic producer. This protection will provide a shield to them to grow stronger in market.
Many economists advocate the case of protectionist on the ground that self sufficiency in key industries is of utmost important. Allowing foreign to be part of such industries make a country more vulnerable and easy catch.
It simply means specializing in various industries and sector. Country whose most of the industries are well established need not to depend on other country for imports of goods and services. Free trade has increased the level of dependency among countries which is not the case with protectionist policy.
Creating job for the labour force is one of the important objectives of every economy. Adoption of protectionist help us to flourish in other industries and sector which leads to job creation. Majority of the people employed in the economy boost the process of growth and development.
Country opting for protectionist trade policy seeks to prevent themselves from the evil of dumping. Developed countries practice dumping on mainly developing countries. Dumping can be understood as scenario where large chunk of goodsare dumped in market at very low price.
Unfair to consumer:
In the case of protectionist policy higher rate of tariffs are imposed on the products which are imported from other country. Producer shift this burden of tariff to the consumer by raising price of product. Here the consumer becomes the one to suffer – he ends up paying more for the product which he could have got at lower price in case of free trade policy.
Retaliation can be understood as situation where if one country imposes high tariff to its partners import other does the same (imposing higher tariff on partner). Many countries chose the option of retaliation for teaching lesson to their trading partner. Consider the case of china and U.S both are practicing retaliation (imposing high tariff on each other imports) which makes no one better off and creates uncertain element for future.
Like an individual have its strong point every country too has it strong point i.e. they can excel in particular industry or sector because they have comparative advantage (natural resource, environment, human capital etc). when a country is adopting protectionist policy it fails to concentrate or focus on particular areas rather gets distributed among different areas. End result is country did not specialize in any of area despite having comparative advantage in some.
Country have tough time deciding on the duration of protection i.e. deciding for how long protection needs to be granted to a particular industry. Many of the industry gets used to protected scenario and continue to enjoy the same for long. doing so the consider this protected environment as their right. Hence it becomes difficult for government to withdraw protection from industries.