What Is Meant by Protectionism?: Chapter Three: Protectionism and Free Trade

Chapter Three: Protectionism and Free Trade
 What is Meant by Protectionism?

Protectionism refers to the act of putting a trade barrier in place in order to protect a country’s
market from the intrusion of foreign companies.
These days, we see that a number of countries are putting different types of restrictions on
foreign trade. On the contrary, some countries encourage free trade and put few barriers on
international trade.
Basically, there are some pros and cons of protectionism. Some economists suggest that it is
bad for the country to impose restrictions on import as consumers ultimately have to bear the
cost of these barriers whereas some economists argue that it is inevitable for a country to
increase trade barriers to protect domestic economy.
If you analyze the arguments from both the side, we have to conclude that there are some
arguments for as well as against protectionism.
 Arguments for Protectionism
1. Protection of Infant Industry

2. Industrialization of Low Wage Nation
3. National Defense
4. Protection of the Home Market
5. Reduction of Balance of Payments Problems
6. Maintenance of the Standard of Living
7. Conservation of Natural Resources
8. Maintenance of Employment and Reduction of Unemployment
9. Retaliation
10. Anti-Dumping
 Arguments against Protectionism

1. Unnecessary Protection
2. Economic Inefficiency
3. Product Price Increases (Consumers bear ultimate costs of tariffs)
4. Disrupt Consumers’ Freedom
5. Political Corruption
6. Rise of Monopoly
7. Product Quality Does Not Improve.
 Instruments of Protectionism
A variety of trade barriers deter the free flow of international goods and services. The following
presents six of the most commonly used barriers.
1. Price-based barriers/Tariff: Imported goods and services sometimes have a tariff

added to their price. Quite often this is based on the value of the goods. For example,
some tobacco products coming into the United States carry an ad valorem tariff (see
below) of over 100 per cent, thus more than doubling their cost to US consumers.
Tariffs raise revenues for the government, discourage imports, and make local goods
more attractive.
2. Quantity limits/Quotas: Quantity limits, often known as quotas, restrict the number
of units that can be imported or the market share that is permitted. If the quota is set at
zero, as in the case of Cuban cigars from Havana to the United States, it is called an
embargo. If the annual quota is set at one million units, no more than this number can
be imported during one year; once it is reached, all additional imports are turned back.
In some cases, a quota is established in terms of market share. For example, Canada
allows foreign banks to hold no more than 16 per cent of Canadian bank deposits, and
the EU limits Japanese auto imports to 10 per cent of the total market.
3. International Price Fixing: Sometimes a host of international firms will fix prices or
quantities sold in an effort to control price. This is known as a cartel. A well-known
example is OPEC (Organization of Petroleum Exporting Countries), which consists of
Saudi Arabia, Kuwait, Iran, Iraq, and Venezuela, among others. By controlling the
supply of oil it provides, OPEC seeks to control both price and profit. This practice is
illegal in the United States and Europe
4. Non-Tariff Barriers: Non-tariff barriers are rules, regulations, and bureaucratic red
tape that delay or preclude the purchase of foreign goods. Examples include:
-slow processing of import permits
-the establishment of quality standards that exclude foreign producers
- “buy local” policy. These barriers limit imports and protect domestic sales.
5. Financial Limits: There are a number of different financial limits. One of the most
common is exchange controls, which restrict the flow of currency. For example, a
common exchange control is to limit the currency that can be taken out of the country;
for example, travelers may take up to only $3,000 per person out of the country. Another
example is the use of fixed exchange rates that are quite favorable to the country. For
example, dollars may be exchanged for local currency on a 1:1 basis; without exchange
controls, the rate would be 1:4. These cases are particularly evident where a black
market exists for foreign currency that offers an exchange rate much different from the
fixed rate.
6. Foreign Investment Controls: Foreign investment controls are limits on foreign direct
investment or the transfer or remittance of funds. These controls can take a number of
different forms, including (1) requiring foreign investors to take a minority ownership
position (49 per cent or less), (2) limiting profit remittance (such as to 15 per cent of
accumulated capital per year), and (3) prohibiting royalty payments to parent
companies, thus stopping the latter from taking out capital.
Such barriers can greatly restrict international trade and investment. However, it must be
realized that they are created for what governments believe are very important reasons. A
close look at one of these, tariffs, helps to make this clearer.
 Types of Tariff:
A tariff is a tax on goods that are shipped internationally. Tariffs are of various types:
- Import Tariff: The most common is the import tariff, which is levied on goods shipped
into a country.
- Export Tariff: A tax levied on goods sent out of the country.
- Transit Tariff: A tax levied on goods passing through a country for goods passing
through the country.
- Specific Duty: It is a tariff based on units, such as $1 for each item shipped into the
country. So a manufacturer shipping in 1,000 pairs of shoes would pay a specific duty
of $1,000.
- Ad Valorem Duty: It is a tariff based on a percentage of the value of the item, so a
watch valued at $25 and carrying a 10 per cent duty would have a tariff of $2.50.
- Compound Duty: It is a tariff consisting of both a specific and an ad valorem duty, so
a suit of clothes valued at $80 that carries a specific duty of $3 and an ad valorem duty
of 5 per cent would have a compound duty of $7.
 What is Mean by Free Trade?

Free trade is a system of commercial policy which draws no distinction between domestic and
foreign commodities and thus which neither imposes additional burden on the latter nor
imposes any special favor to the former.
- It refers to the complete absence of trade barriers such as tariffs, quotas, taxes, subsidies
on foreign imports.
 Arguments for Free Trade:

- International Specialization
- Increases Production
- Proper Utilization of Natural Resources
- Opportunity to Export Surplus Goods
- Advantages to Consume Cheaper Goods
- Expansion of Markets
- Expansion of Knowledge and Culture
- Increases the Standard of Living of Labor
- World Peace
- Economic Developments of Developing Countries
 Arguments Against Free Trade:
- Destruction of Infant Industries
- Dependency on Foreign Countries
- Hindrance in the Growth of Indigenous Industry
- Import of Unnecessary, Harmful and Luxury Goods
- Obstacles in Industrialization
- Dumping
- International Conflict
- Threats to Independence
Methods of Removing Barriers of Free Trade
- Being Member of International and Regional Alliances

- Formation of Cartel
- Obey the Conditions Set by GATT or WTO
- Reduce Export and Import Tariff
- Remove Quota
- Increase Counter-Trade
- Reduce Red-Tapism

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What Is Meant by Protectionism?: Chapter Three: Protectionism and Free Trade

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Chapter Three: Protectionism and Free Trade

 What is Meant by Protectionism?

 Arguments for Protectionism

1. Protection of Infant Industry

 Arguments against Protectionism

1. Price-based barriers/Tariff: Imported goods and services sometimes have a tariff

 What is Mean by Free Trade?

 Arguments for Free Trade:

- Being Member of International and Regional Alliances

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