Definition of free trade: The unobstructed trade of goods and services between two countries with no restrictions on imports and exports.
Definition of protectionism: where a country erects barriers to trade in order to protect the domestic economy from the disadvantages of international trade.
Types of protectionism.
tariffs: Tax on imports.
Quotas: A restriction on the physical number of a particular import.
Subsidies: A grant given to producers of a good.
Voluntary Export Restraints (VERS): Political pressure placed on a country not to export a good.
Administrative obstacles: Bureaucracy. VERs, voluntary export restraints, through pressuring country e.g. Japanese export restraints of vehicles to UK.
Embargo: A total ban of the import of a particular good.
Health and safety standards: Not accepting goods because of possible health risks.
Environmental standards: Not accepting goods due to pollutive biproducts, e.g. certain chemicals, not being handled correctly.
Import license: A payment to the government for the right to import.
Arguments for protectionism.
Infant industry argument: This argument suggests that an industry needs times to develop. This takes into account that it needs to develop economies of scale and a learning curve.
Efforts of a developing country to diversify.
Protection of domestic employment.
Source of government revenue: The consumer has the burden.
Strategic arguments.
Means to overcome a balance of payments disequilibrium.
Anti-dumping: Dumping is known as the selling of goods on the international market below the production cost.
Arguments against protectionism.
Inefficiency of resource allocation.
Costs of long-run reliance on protectionist methods.
Increased prices of goods and services to consumer.
The cost effect of protected imports on export competitiveness.
Less choice for the consumer.
Industries may not develop because of a disincentive to be competitive.
Trade war.
Protection of corrupt management.
Negative effect in employment in import sector.
Decrease of international competitiveness if imported good is an input for an exporting good.
