THE PROJECT REPORT ON

COMPARISON BETWEEN
FREE TRADE AND PROTECTIONISM

SUBMITTED TO: ABHISHEK KUKRETI SIR

FACULTY OF LAW

SUBMITTED BY:AKANSHA JHA

ID: 1505C00011

COURSE: BBA LLB HONS 5TH Year

 ACKNOWLEDGMENT

"I have taken efforts in this project. However, it would not have been possible
without the kind support and help of many individuals. I would like to extend
our sincere thanks to all of them.

I would like to express my gratitude towards my parents for their kind co-
operation and encouragement which help me in completion of this project.

MY thanks and appreciations also go to my colleague in developing the project

and people who have willingly helped me out with their abilities.

AKANSHA JHA
INTRODUCTION
FREE TRADE
Free trade is a policy formed between two or more nations that permits
the unlimited import or export of goods or services between partner
nations. However, not all trade is free trade. When nations don't
have free trade agreements, which are treaties that outline the
parameters of trade between trade partners, tariffs are imposed on
goods and services. Tariffs are taxes that nations impose on imports.
Tariffs increase the cost of goods, which is passed on to consumers.
Free trade eliminates tariffs and makes corporations more competitive in
foreign markets. Many critics of free trade question whether is beneficial
for countries. This lesson will discuss the pros and cons of free trade as
well as examples that illustrate these pros and cons.

There are many benefits of free trade, such as:

 Giving corporations comparative advantage

 Generating currency
 Opening up markets

Adam Smith wrote in his 1776 book The Wealth of Nations that free trade was
beneficial to trading partners. Smith noted that when the countries in a free trade
agreement made products and provided that product for the other country at a
cheaper rate than the receiving country could produce it, both countries
benefited. We, as consumers, often apply that concept to our daily lives. We
purchase goods or services that we cannot cost-effectively produce ourselves,
benefiting both parties.
David Ricardo expanded on Smith's ideas, arguing that countries should do
what they do better and cheaper than other countries. This is
called comparative advantage. Ricardo further noted that concentrating on
core competencies gave nations a comparative advantage.
Free trade also helps countries generate foreign currency that they can use to
purchase the things that they need. Japan, for instance, exports cars and
computers to China and the United States, generating foreign currency. Japan
takes the revenue it earned from exporting and uses it to import needed
products, such as food or mineral fuels.
Free trade opens foreign markets and lowers barriers for corporations that
otherwise might not be able to compete against local competitors. As previously
mentioned, without free trade agreements, foreign corporations must pay tariffs
that increase their cost and decrease competitiveness.

PROTECTIONISM
policy of protecting domestic industries against foreign competition by
means of tariffs, subsidies, import quotas, or other restrictions or handicaps
placed on the imports of foreign competitors. Protectionist policies have
been implemented by many countries despite the fact that virtually all
mainstream economists agree that the world economy generally benefits
from free trade.
Government-levied tariffs are the chief protectionist measures. They raise
the price of imported articles, making them more expensive (and therefore
less attractive) than domestic products. Protective tariffs have historically
been employed to stimulate industries in countries beset
by recession or depression. Protectionism may be helpful to emergent
industries in developing nations. It can also serve as a means of
fostering self-sufficiency in defense industries. Import quotas offer another
means of protectionism. These quotas set an absolute limit on the amount
of certain goods that can be imported into a country and tend to be more
effective than protective tariffs, which do not always dissuade consumers
who are willing to pay a higher price for an imported good.
Throughout history wars and economic depressions (or recessions) have
led to increases in protectionism, while peace and prosperity have tended
to encourage free trade. The European monarchies favoured protectionist
policies in the 17th and 18th centuries in an attempt to increase trade and
build their domestic economies at the expense of other nations; these
policies, now discredited, became known as mercantilism. Great
Britain began to abandon its protective tariffs in the first half of the 19th
century after it had achieved industrial preeminence in Europe. Britain’s
spurning of protectionism in favour of free trade was symbolized by its
repeal in 1846 of the Corn Laws and other duties on imported grain.
Protectionist policies in Europe were relatively mild in the second half of the
19th century, although France, Germany, and several other countries were
compelled at times to impose customs duties as a means of sheltering their
ging industrial sectors from British competition. By 1913, however, customs
duties were low throughout the Western world, and import quotas were
hardly ever used. It was the damage and dislocation caused by World War
I that inspired a continual raising of customs barriers in Europe in the
1920s. During the Great Depression of the 1930s, record levels of
unemployment engendered an epidemic of protectionist measures. World
trade shrank drastically as a result.
CONCEPT OF FREE TRADE
There’s also an argument that free trade makes it harder for countries to
develop from poor to rich. If every country specializes in what they’re ‘best’ at
making, poorer countries can get stuck specializing in lower wage industries
like mining, fishing or farming. Instead they argue that some degree
of protectionism is needed to build up more advanced industries.
In all of this it's good to keep in mind that details matter. Some trade deals
actually have provisions to help the people likely to be hurt by more trade.
Other have provisions intended to force countries to protect the environment or
improve working conditions. Other deals don’t do this at all.
Also, not all trade has the same economic consequences. For instance, trade
between countries with similar economies—like the countries within Western
Europe— is very different from trade between the EU and China. That’s part of
the reason people can be for free trade in some cases and against it in others.

Free trade agreements are designed to increase trade between two or more
countries. Increased international trade has the following six main advantages:
1. Increased Economic Growth: The U.S. Trade Representative Office
estimates that NAFTA increased U.S. economic growth by 0.5% a year.
2. More Dynamic Business Climate: Often, businesses were protected
before the agreement. These local industries risked becoming
stagnant and non-competitive on the global market. With the protection
removed, they have the motivation to become true global competitors.
3. Lower Government Spending: Many governments subsidize local
industry segments. After the trade agreement removes subsidies, those
funds can be put to better use.
1. Foreign Direct Investment: Investors will flock to the country. This adds
capital to expand local industries and boost domestic businesses. It also
brings in U.S. dollars to many formerly isolated countries.
2. Expertise: Global companies have more expertise than domestic
companies to develop local resources. That's especially true in mining, oil
drilling, and manufacturing. Free trade agreements allow global firms
 Access to these business opportunities. When the multinationals partner
with local firms to develop the resources, they train them on the best
practices. That gives local firms access to these new methods.
3. Technology Transfer: Local companies also receive access to the latest
technologies from their multinational partners. As local economies grow,
so do job opportunities. Multi-national companies provide job training to
local employees.

Environmental safeguards can prevent the destruction of natural resources

and cultures. Labor laws prevent poor working conditions. The World
Trade Organization enforces free trade agreement regulations.
Developed economies can reduce their agribusiness subsidies,
keeping emerging market farmers in business. They can help local
farmers develop sustainable practices. They can then market them as such
to consumers who value that.
Countries can insist that foreign companies build local factories as part of
the agreement. They can require these companies to share technology and
train local workers.
The Bottom Line
Free trade agreements give countries access to more markets in the global
economy. But they have advantages and disadvantages.
On the plus side, FTAs can force local industries to improve
competitively and rely less on government subsidies. These can open new
markets, increase GDP, and invite new investments. They also allow
companies to discover new technologies and better ways of doing things.
On the downside, free trade agreements open a country to degradation of
natural resources, destruction of traditional livelihoods, and local
employment issues.
Countries entering FTAs must protect their people and resources against
the negative effects. But trade protectionism is rarely the most effective
solution.
CONCEPT OF PROTECTIONISM
Trade protectionism is a policy that protects domestic industries from unfair
competition from foreign ones. The four primary tools
are tariffs, subsidies, quotas, and currency manipulation.
Protectionism is a politically motivated defensive measure. In the short run, it
works. But it is very destructive in the long term. It makes the country and its
industries less competitive in international trade.
Four Protectionist Policies
The most common protectionist strategy is to enact tariffs that tax imports. That
immediately raises the price of imported goods. They become less competitive
when compared to local goods. This method works best for countries with a lot
of imports, such as the United States.
The chart below shows the share of tariffs collected on U.S. imports since 1790.
Tariffs hit a record 57.3% in 1830 due to the Tariff of Abomination.

Protectionism fell out of favor after the Smoot-Hawley Tariff of 1930. It was
designed to protect farmers from agricultural imports from Europe. U.S. farmers
were already suffering from the Dust Bowl. European farmers were ramping up
production after the destruction of World War I. But Congress added many
other tariffs. Other countries retaliated. The resultant trade war restricted global
trade. It was one reason for the extended severity of the Great Depression.
Governments also frequently subsidize local industries to help them compete in
the global market. Subsidies come in the form of tax credits or direct payments.
The most commonly used are farm subsidies. That allows producers to lower
the price of local goods and services. This makes the products cheaper even
when shipped overseas. Subsidies work even better than tariffs. This method
works best for countries that rely mainly on exports.
But sometimes subsidies can have the opposite effect. The Agricultural
Adjustment Act of 1933 allowed the government to pay farmers not to grow
crops or livestock. The government wanted to control supply and increase
prices. Farmers could also let their fields rest and regain nutrients due to
overproduction. It helped the agriculture industry but raised food costs during
the Depression.
A third method is to impose quotas on imported goods. This method is more
effective than the first two. No matter how low a foreign country sets the price
through subsidies, it can’t ship more goods.
Most textbooks omit the fourth type of trade protectionism because it is subtle.
It is a deliberate attempt by a country to lower its currency value. This would
make its exports cheaper and more competitive. This method can result in
retaliation and start a currency war. One way countries can lower their
currency's value through a fixed exchange rate, like China's yuan. Another way
is by creating so much national debt that it has the same effect. Some countries
criticize the U.S. government for doing that, creating a U.S. dollar decline.

ADVANTAGES
If a country is trying to grow strong in a new industry, tariffs will protect it from
foreign competitors. That gives the new industry’s companies time to develop
their own competitive advantages.
Protectionism also temporarily creates jobs for domestic workers. The
protection of tariffs, quotas, or subsidies allows domestic companies to hire
locally. This benefit ends once other countries retaliate by erecting their own
protectionism.

DISADVANTAGES
In the long term, trade protectionism weakens the industry. Without
competition, companies within the industry have no need to
innovate. Eventually, the domestic product will decline in quality and be more
expensive than what foreign competitors produce.
Job outsourcing is a result of declining U.S. competitiveness. Competition has
declined from decades of the United States not investing in education. This is
particularly true for high-tech, engineering, and science. Increased trade opens
new markets for businesses to sell their products. The Peterson Institute for
International Economics estimates that ending all trade barriers would increase
U.S. income by $500 billion.
Increasing U.S. protectionism will further slow economic growth. It would
cause more layoffs, not fewer. If the United States closes its borders, other
countries will do the same. This could cause layoffs among the 12 million U.S.
workers who owe their jobs to exports.
Antiprotectionism
Since Smoot-Hawley, most countries have been antiprotectionist. They realize
protectionism lowers international trade for everyone. One of the strongest tools
in antiprotectionism is the free trade agreement. It reduces or eliminates tariffs
and quotas between trading partners.
The largest agreement is the North American Free Trade Agreement. It is
between the United States, Canada, and Mexico. The Trans-Pacific
Partnership would have been larger. But President Trump withdrew the United
States from that agreement. As a result, the other involved countries have
formed their own accord. If China decides to join them, it would replace
NAFTA as the world's largest trade pact.
Also in the running for the world's largest trade agreement would have been
the Transatlantic Trade and Investment Partnership. It was between the
European Union and the United States. But the Trump administration has not
pursued it.
A large multilateral trade pact is the Dominican Republic-Central America Free
Trade Agreement, which is between the United States and Central America.
There are also bilateral agreements with Chile, Colombia, Panama, Peru, and
Uruguay. The United States also has agreements with the Middle Eastern
countries of Israel, Jordan, Morocco, Bahrain, and Oman.
But FTAs don't eliminate protectionist measures like subsidies or currency
wars. One of the disadvantages of NAFTA was that subsidized U.S. farm
products put Mexican farmers out of business. Despite their disadvantages for
some, free trade agreements have more pros than cons.
In a global economy, protectionism is damaging for everyone. Trump’s
“America First” economic policy could hurt the U.S. economy in the long
run. Tariff imposition on imports from China, Canada, EU, Mexico, and India
have triggered retaliatory tariffs. A trade war with these large economies leads
to serious consequences on U.S. exporters and labor force.
But the immediate losers will be the global consumers. They will be forced to
pay inflated prices. High costs could create inflation around the world.
Free trade agreements could advance world economy. Although unfavorable to
uncompetitive domestic industries, these boost local industries that can produce
at better economies of scale than those of other nations.
 WHAT ARE TRADE BARRIERS

Tariff barriers can include a customs levy or tariff on goods entering a country
and are imposed by a government. Free trade agreements seek to reduce tariff
barriers. You can see what reductions may apply to your products from New
Zealand’s free trade agreements at the Tariff Finder Non-tariff barriers can
include excessive red tape, onerous regulations, unfair rules or decisions, or
anything else that is stopping you from competing effectively.
Non-tariff barriers can affect all forms of goods and services exports – from
food and manufactured products, through to digital services.

TARIFF BARRIER
NON- TARIFF BARRIER
When goods are traded between countries, there is typically a fee charged for a
good entering a different territory. These fees serve two functions: first, they
provide governments with a (relatively small) amount of income; and second
they make foreign goods more expensive – as the cost of a foreign good
includes the tariff – helping domestic producers to compete with foreign goods.
Although this might seem like a good thing to do from a domestic perspective,
charging tariffs most often causes reciprocal action against domestic goods
entering foreign markets, making it more difficult for domestic producers to sell
abroad.
Because of this, tariffs are generally seen as a barrier to trade, as they increase
the price of goods for everyone, which makes them less attractive to consumers
and reduces the volume of trade.
REASON FOR TARIFFS

Tariffs are often created to protect infant industries and developing economies
but are also used by more advanced economies with developed industries. Here
are five of the top reasons tariffs are used:
Protecting Domestic Employment
The levying of tariffs is often highly politicized. The possibility of increased
competition from imported goods can threaten domestic industries. These
domestic companies may fire workers or shift production abroad to cut costs,
which means higher unemployment and a less happy electorate. The
unemployment argument often shifts to domestic industries complaining about
cheap foreign labor, and how poor working conditions and lack of regulation
allow foreign companies to produce goods more cheaply. In economics,
however, countries will continue to produce goods until they no longer have
a comparative advantage (not to be confused with an absolute advantage).
Protecting Consumers
A government may levy a tariff on products that it feels could endanger its
population. For example, South Korea may place a tariff on imported beef from
the United States if it thinks that the goods could be tainted with a disease.
Infant Industries
The use of tariffs to protect infant industries can be seen by the Import
Substitution Industrialization (ISI) strategy employed by many developing
nations. The government of a developing economy will levy tariffs on imported
goods in industries in which it wants to foster growth. This increases the prices
of imported goods and creates a domestic market for domestically produced
goods while protecting those industries from being forced out by
more competitive pricing. It decreases unemployment and allows developing
countries to shift from agricultural products to finished goods.
Criticisms of this sort of protectionist strategy revolve around the cost
of subsidizing the development of infant industries. If an industry develops
without competition, it could wind up producing lower quality goods, and the
subsidies required to keep the state-backed industry afloat could sap economic
growth.
National Security
Barriers are also employed by developed countries to protect certain industries
that are deemed strategically important, such as those supporting national
security. Defense industries are often viewed as vital to state interests, and often
enjoy significant levels of protection. For example, while both Western Europe

and the United States are industrialized, both are very protective of defense-
oriented companies.
Retaliation
Countries may also set tariffs as a retaliation technique if they think that a
trading partner has not played by the rules. For example, if France believes that
the United States has allowed its wine producers to call its domestically
produced sparkling wines "Champagne" (a name specific to the Champagne
region of France) for too long, it may levy a tariff on imported meat from the
United States. If the U.S. agrees to crack down on the improper labeling, France
is likely to stop its retaliation. Retaliation can also be employed if a trading
partner goes against the government's foreign policy objectives.
NON- TARIFF BARRIER
 Specific tariffs
 Ad valorem tariffs
 Licenses
 Import quotas
 Voluntary export restraints
 Local content requirements

Specific Tariffs
A fixed fee levied on one unit of an imported good is referred to as a specific
tariff. This tariff can vary according to the type of good imported. For example,
a country could levy a $15 tariff on each pair of shoes imported, but levy a $300
tariff on each computer imported.
Ad Valorem Tariffs
The phrase ad valorem is Latin for "according to value," and this type of tariff is
levied on a good based on a percentage of that good's value. An example of an
ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles.
The 15% is a price increase on the value of the automobile, so a $10,000 vehicle
now costs $11,500 to Japanese consumers. This price increase protects domestic
producers from being undercut but also keeps prices artificially high for
Japanese car shoppers.
Non-tariff barriers to trade
Licenses
A license is granted to a business by the government and allows the business to
import a certain type of good into the country. For example, there could be a
restriction on imported cheese, and licenses would be granted to certain
companies allowing them to act as importers. This creates a restriction on
competition and increases prices faced by consumers.
Import Quotas
An import quota is a restriction placed on the amount of a particular good that
can be imported. This sort of barrier is often associated with the issuance of
licenses. For example, a country may place a quota on the volume of imported
citrus fruit that is allowed.
Voluntary Export Restraints (VER)
This type of trade barrier is "voluntary" in that it is created by the exporting
country rather than the importing one. A voluntary export restraint is usually
levied at the behest of the importing country and could be accompanied by a
reciprocal VER. For example, Brazil could place a VER on the exportation of
sugar to Canada, based on a request by Canada. Canada could then place a VER
on the exportation of coal to Brazil. This increases the price of both coal and
sugar but protects the domestic industries.
Local Content Requirement
Instead of placing a quota on the number of goods that can be imported, the
government can require that a certain percentage of a good be made
domestically. The restriction can be a percentage of the good itself or a
percentage of the value of the good. For example, a restriction on the import of
computers might say that 25% of the pieces used to make the computer are
made domestically, or can say that 15% of the value of the good must come
from domestically produced components.
In the final section, we'll examine who benefits from tariffs and how they affect
the price of goods
The benefits of tariffs are uneven. Because a tariff is a tax, the government will
see increased revenue as imports enter the domestic market. Domestic industries
also benefit from a reduction in competition, since import prices are artificially
inflated. Unfortunately for consumers - both individual consumers and
businesses - higher import prices mean higher prices for goods. If the price of
steel is inflated due to tariffs, individual consumers pay more for products using
steel, and businesses pay more for steel that they use to make goods. In short,
tariffs and trade barriers tend to be pro-producer and anti-consumer.
The effect of tariffs and trade barriers on businesses, consumers and the
government shifts over time. In the short run, higher prices for goods can reduce
consumption by individual consumers and by businesses. During this period,
some businesses will profit, and the government will see an increase in revenue
from duties. In the long term, these businesses may see a decline in efficiency
due to a lack of competition, and may also see a reduction in profits due to the
emergence of substitutes for their products. For the government, the long-term
effect of subsidies is an increase in the demand for public services, since
increased prices, especially in foodstuffs, leave less disposable income

CONCLUSION

For free flow of International Trade the concept of free trade policy is very
important, but we must keep in mind that protectionism is also very important
aspect of trade law. The free trade concept is based on market mechanism which
is controlled by the force of demand and supply. Accordingly government
should have less interference in trade and commerce but if not interfered the
trade could be exploited in many ways therefore Gatt was formed intended to
reduce the tariff and non-tariff barriers. Trade barriers are the policies of
government.
REFERENCES
BOOKS
International Trade law by Dr. S.R.Mynemi Page No. 5-6 3rd Edition.
WEBSITE
http://www.investopedia.com
http://www.trade.gov.com
Arthur. W Brian Positive feedback in theEconomy.
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