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Protection or Free Trade for International Trade - Essay Example

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Summary
The international trade policy of a country with other countries covers mainly import tariffs, import quotas, subsidies to local producers, and other administrative barriers…
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Protection or Free Trade for International Trade

Download file to see previous pages... While both protectionism and free trade have their own advantages and disadvantages, the cost by far outweighs the benefits of protectionism. The arguments made in favor of protection are that the foreign producers have a “comparative advantage”, that protection helps the local infant industries flourish, that without protection importers would recklessly “dump” goods in the market, that protection protects the local producers, and finally, that protection prevents an imbalance of trade. However, each of these “perceived benefits” of protectionism comes at long-term costs which are far greater than the short-term benefits as explained below. The “comparative advantage” argument assumes that exporters from other countries have a strong competitive advantage that makes local producers less competitive thereby driving local companies out of business. For example, the labor cost in a developing country compared to that in a developed country puts some of the labor intensive local industries at a relative disadvantage. However, by moving to free-trade, countries are able to specialize in some other field where they have a comparative advantage. With such a specialization, the countries are able to take advantage of efficiencies generated from economies of scale and increased output. Also, free international trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to increased production. In the last few year, while China and India have taken up more work on the labor intensive industries, businesses in the developed countries have been able to actually take advantage of the lower cost and focus on their comparative advantage and invest more on research and development, and other high value added jobs. Besides, the comparative advantages do not last forever. Sooner or later, the advantage fades away. For example, according to Lyndesy Romick of global envision, in China labor accounted for only about 2 percent of a manufacturing company’s total costs in 2000 but 2010 it was closer to 12 percent. That protectionism helps grow the infant industries is a misplaced fallacy. Government subsidizing of a new industry may channel too many resources into that industry, and can render the industry permanently inefficient and vulnerable to competition. Besides, most infant industries are at a competition from domestic competitors and not necessarily only importers. In the last few decades, the "infant" plastics, television, and computer industries have made out very well without any protection. Next, we consider the argument of dumping. Dumping may be defined as the overflow of cheap priced goods in order to under-cut the competition and gain market share. Now, if an importer starts dumping goods in a market, it would actually be good for the customers, and for the government in terms of revenue it makes no change. The only bad effect of dumping is for local producers. Logically, no firm can enjoy “dumping” as a sustainable strategy – selling below cost in the long-term would drive them to bankruptcy. Also, according to Rothbard, “…historical investigation has not turned up a single case where predatory pricing, when tried, was successful, and there are actually very few cases where it has even been tried.” The next pro-protectionism claim that it protects local producers is also at a huge cost. By protecting the local producers, there is no ...Download file to see next pagesRead More
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