Free Trade and Protectionism - Report Example

FREE TRADE AND PROTECTIONISM Free trade Free trade is the trade system followed between countries with certain offers in tax or other means due to the economic condition. In order to explain this more clearly we can also define that free trade is the trade between the nations without the protective measures and the custom tariffs. The government is not discriminating against the imports or in the other terms they interfere with the imports but it is giving certain freeness to the international trade especially for the import of many trades. DOMESTIC PRODUCERS: Actually it is made to protect the domestic producers or in the other words it is made for the people to be more beneficial by purchasing the imported goods through foreign trade so that the cost of the good becomes cheaper when produced by a domestic manufacturer and purchasing that by the people. Hence free trade policy is a cost effective policy adopted by the governments. As sometimes the domestic substitute's price goes higher. So the government prefers the free trade policy through which the price of the goods becomes lower and in the other hand the economic improves. The free trade policy facilitates the optimal use of the economic resources. for an instance for some people to understand the free trade policy better this example could be taken if it is not possible to grow paddy in a desert country which will be very costly to grow the crop the country could make an free trade with some other country which grows paddy at a cheaper and a affordable rate so the government gets the maximum benefit, to say exactly the country is benefited economically. This free trade is beneficial in many ways to a country. But sometimes many groups also oppose for the method of free trade. The free trade is based on the optimal use of the economic resources by a country. To understand this in a better way the barriers to the free trade is chronicle shifting between the industries and the geographic areas. RAW RESOURCES: The very main concept for the free trade is that each and every country should note on their availability of the raw materials for the production of the particular product. for an instance if the people of a country shows more interest to drink coffee rather than tea the country should know whether the demand could be meted out by the domestic coffee makers if it is not possible then the government should arrange for the free trade because the cost for the product becomes cheaper at that occasion. But instead of that if he tries to cultivate coffee with some other expensive technologies automatically the price goes to the peak. So now you can decide which one is cheaper whether the free trade product or the product manufactured in the domestic country. So this is the comparison between the free trade product and the domestic costly product. The trade of such goods flow between the countries with the unhinderence of the government so this makes the free trade easier. Since the time of the Second World War United States has become the most consistent proponents of the reduced tariffs and the free trade helped to establish the general agreements on the tariff barrier and the free trade. If we take the account of the economic theory the global free trade is not benefit to the society some times the selective application of the free trade and the tariff of some countries leads to the in efficiency of the country's economy. Due to this free trade policy the domestic producer suffers a lot. The opposers for the free trade policy are the nationalists, communists, agriculturalist they oppose due to some supposed problems. Sometimes they are also opposed by the domestic producer because the free trade policy creates a loss to the domestic producer and some time leads to the flooding of the local goods. The anti globalizations groups also do not support free trade because the economic conditions of the poor do not go up but they become poorer. Karl Marx wrote in The Communist Manifesto, "The bourgeoisie...has set up that single, unconscionable freedom -- Free Trade. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation." Ecuadorian President Rafael Correa has denounced the "sophistry of Free Trade," in an introduction he wrote for a book titled "The Hidden Face of Free Trade Accords". One of the authors of that book is today Correa's Energy Minister, Alberto Acosta. Citing as his source the book, "Kicking Away the Ladder", written by a Korean economist based at Cambridge University, Ha joon Jang, Correa identified the difference between an "American systems" opposed to "a British System" of free trade. The latter, he says, was explicitly viewed by the Americans as "part of the British imperialist system." Correa wrote that Chang showed that it was Treasury Secretary Alexander Hamilton, and not Friedrich who was the first to present a systematic argument defending industrial protectionism GRAPHICAL REPRESENTATION: A simple economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits of free trade. The graph given below shows the entire theory. The graphic representation at the right examines the effect of the burden of an import tariff on some imaginary good. Prior to the tariff, the price of the good in the world market is Pworld. The tariff increases the domestic price to Ptariff. The higher price causes domestic production to increase from QS1 to QS2 and causes domestic consumption to decline from QC1 to QC2. This has three main effects on public welfare. Consumers are made worse off because the consumer surplus green region becomes smaller. Producers are better off because the producer surplus yellow region is made larger. The government also has additional tax revenue blue region. However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society. An almost identical analysis of this tariff from the point of view of a net producing country yields parallel results. From that country's viewpoint, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers. Under similar analysis, export tariffs, import quotas, and export quotas all yield nearly identical results. Sometimes consumers are better off and producers worse off, and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Free trade creates winners and losers, but theory and empirical evidence show that the sizes of the winnings from free trade are larger than the losses. PROTECTIONISM: The word protection itself means security. So when studying protectionism along with free trade means giving protection to the producers. So the exact theory of the protectionism is protecting the domestic producers by limiting the tariff or quotas for the importation of the foreign goods and the services. This is made exactly to save the domestic producers because when the free trade is allowed the economic condition of the domestic manufacturer or the producer becomes poor. This is the main need of the protectionism act. This act is made possible by putting higher tariffs to the foreign goods so by making that the cost of the foreign goods goes higher so naturally people will purchase the domestic producer's product. So in the market the free trade good cost goes higher at the same time the price of the domestic producer becomes cheaper. Due to this reason the flooding of the foreign goods happens. the various measures that a government undertakes are as follows subsidies this is made to protect the existing business from the risk change of the cost of the labors and the materials and the next one is the protective tariff that is using this the government makes the higher tariff for the foreign product which will be higher than the domestic product. The third methodology is quotas this prevents the dumping of the cheaper foreign goods in the market. Various other methods are tax cuts, exchange rates. So by all this above mentioned facts we can decide that the free trade is helpful for some country and some where it is also leading to the poor economy so that protectionism is a good method to save the domestic producer to stand their economy. REFERENCES: www.answers.com/protectionism www.answers.com/freetrade Read More