Question. 4)Distinguish between free trade and protection.
Discuss the merits and demerits of free trade vs. protection for a developing
country like India.
Ans :
The global economy is set to decline for the first
time since World War II. Economists have engaged in a lively debate over the
benefits and pitfalls of free trade and protectionism. Many economies have
adopted free-trade policy, or an economy in which trade tariffs and barriers
have been lifted. allowing for the free flow of trade between one or more
nations. Protectionism refers to policies where nations restrict imports and
exports.
What is Protectionism?
Protectionism refers to policies, rules and
regulations that help a nation place barriers in the form of tariffs while
trading with any other country. It is sometimes also a ploy by a country to
safeguard the interests of its domestic producers as cheap imported commodities
tend to shut down factories making that commodity inside the country. Though at
times protectionism is adopted to serve national interests, there are times
when countries cry foul as they face non economic tariffs. For example, carpets
made in India are world famous and India exports them to many countries
including Europe and the US. But suddenly US chose to place barriers in this
trade citing use of child labor in the manufacture of carpets in India.
One of the easiest ways to reduce imports of
commodities is to raise the price of imports by putting in place tariffs. This
helps domestic producers as they remain competitive in the domestic markets.
Other ways of protectionism are to place quota restrictions on commodities so
that the quantity entering the country is miniscule which does not affect local
producers.
Advantages of Trade Protectionism
If a country is trying to grow strong in a
new industry, tariffs will protect it from foreign competitors. This allows
companies in the new industry time to learn how to produce the good
efficiently, and develop their own competitive advantages.
Protectionism also temporarily creates jobs
for domestic workers. As domestic companies are protected by tariffs, quotas or
subsidies, they will hire locally. This will occur until other countries
retaliate by erecting their own protectionism within that industry.
Disadvantages of Trade Protectionism
In the long term, trade protectionism weakens
the industry. Without competition, companies within the industry won't innovate
and improve their products or services. There's no need to. Eventually, consumers
will pay more for a lower quality product than they would get from foreign
competitors. Job outsourcing is a result of declining U.S. competitiveness,
itself is a result of decades of the U.S. 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 and cause more layoffs, not less. If the U.S. 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.
What is Free Trade?
The concept of Free trade on the other hand
refers to a situation where there are no barriers in trade between two
countries. This not only helps both the nations, it also paves the way for
cooperation and trade in more areas and removing mistrust and ill will that is
always there in an atmosphere riddled with sanctions, tariffs and embargos.
Free trade does not take place overnight and this is why nations are entering
into economic pacts and agreements to slowly and gradually remove all such artificial
tariffs. Free trade encourages transparency and healthy competition. Nations
have come to realize that others can be superior to them in production of
certain goods and services while they can be superior in other areas.
To help nations of the world prosper through
international trade, GATT has paved the way for World Trade Organization that
sets the guidelines for international trade and puts into place a robust
mechanism for the resolution of disputes between member countries.
In brief:
Free Trade vs Protectionism
• Free trade is an ideal situation while
protectionism is the order of the day in international trade
• Protectionism takes many shapes and
sometimes, countries crying foul as they are made to suffer hardships cannot
even prove it
• WTO has been set up to pave the way for
free trade by gradually removing all artificial barriers between member
countries
• Free trade encourages healthy competition
whereas protectionism leads to jealousy and ill will.
Advantages of free trade
Free trade occurs
when there are no artificial barriers put in place by governments to restrict
the flow of goods and services between trading nations.
When trade barriers, such as tariffs and
subsidies are put in place, they protect domestic producers from international
competition and redirect, rather than create trade flows.
- Increased
production
Free trade enables countries to specialise in
the production of those commodities in which they have a comparative
advantage 
.
.
With specialisation countries are able to take
advantage of efficiencies generated from economies of scale and increased
output.
International trade increases the size of a
firm’s market, resulting in lower average costs and increased productivity,
ultimately leading to increased production.
- Production
efficiencies
Free trade improves the efficiency of
resource allocation. The more efficient use of resources leads to higher
productivity and increasing total domestic output of goods and services.
Increased competition promotes innovative
production methods, the use of new technology, marketing and distribution
methods.
- Benefits
to consumers
Consumers benefit in the domestic economy as
they can now obtain a greater variety of goods and services.
The increased competition ensures goods and
services, as well as inputs, are supplied at the lowest prices. For example in
Australia imported motor vehicles would cost 35% more if the 1998 tariff levels
still applied. Clothing and footwear would also cost around 24% more.
- Foreign
exchange gains
When Australia sells exports overseas it
receives hard currency from the countries that buy the goods. This money is
then used to pay for imports such as electrical equipment and cars that are
produced more cheaply overseas.
- Employment
Trade liberalisation creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold (close down) in the competitive environment. With free trade many jobs have been created in Australia, especially in manufacturing and service industries, which can absorb the unemployment created through restructuring as firms close down or downsize their workforce. When tariffs were increased substantially in the period 1974–1984 for textiles and footwear - employment in the sector actually fell by 50 000, adding to overall unemployment. - Economic
growth
The countries involved in free trade
experience rising living standards, increased real incomes and higher rates of
economic growth. This is created by more competitive industries, increased
productivity, efficiency and production levels.
Disadvantages of free trade
Although free trade has benefits, there are a
number of arguments put forward by lobby groups and protestors who oppose free
trade and trade liberalisation. These include:
o With the removal of trade barriers, structural
unemployment may occur in the short term. This
can impact upon large numbers of workers, their families and local economies.
Often it can be difficult for these workers to find employment in growth
industries and government assistance is necessary.
o Increased domestic economic instability from
international trade cycles, as economies become dependent on global markets. This means that businesses, employees and consumers
are more vulnerable to downturns in the economies of our trading partners, eg.
Recession in the USA leads to decreased demand for Australian exports, leading
to falling export incomes, lower GDP, lower incomes, lower domestic demand and
rising unemployment.
o International markets are not a level playing
field as countries with surplus products may dump
them on world markets at below cost. Some efficient industries may find it
difficult to compete for long periods under such conditions. Further, countries
whose economies are largely agricultural face unfavourable terms of trade
(ratio of export prices to import prices) whereby their export income is much
smaller than the import payments they make for high value added imports, leading
to large CADs and subsequently large foreign debt levels.
o Developing or new industries may find it difficult to
become established in a competitive environment with no short-term protection policies by
governments, according to the infant industries argument. It is difficult to
develop economies of scale in the face of competition from large foreign TNCs.
This can be applied to infant industries or infant economies (developing
economies).
o Free trade can lead to pollution and other environmental
problems as companies fail to include these
costs in the price of goods in trying to compete with companies operating under
weaker environmental legislation in some countries.
o Pressure to increase protection during the GFC
During the global financial crisis and recession of 2008-2009, the impact of falling employment meant that protection pressures started to rise in many countries. In New South Wales, for example, the state government was criticised for purchasing imported uniforms for police and firefighters at cheaper prices rather than purchasing Australian made uniforms from Australian companies. Similar pressures were faced by governments in the United States, Britain and other European countries.
During the global financial crisis and recession of 2008-2009, the impact of falling employment meant that protection pressures started to rise in many countries. In New South Wales, for example, the state government was criticised for purchasing imported uniforms for police and firefighters at cheaper prices rather than purchasing Australian made uniforms from Australian companies. Similar pressures were faced by governments in the United States, Britain and other European countries.
External Sector Management refers to Policies
adopted by a country with
reference exports and imports. It can be free trade policy or restricted trade policy. A
restricted trade policy seeks to maintain a system of trade restrictions with the objective
of protecting domestic economy from competition of foreign products. A free trade
policy involves complete absence of tariffs, quotas, exchange restrictions etc.
Thus, external sector management strongly influences the direction, trend and growth
of foreign trade of country. This is an important economic instrument, which can be
used by a, country, with suitable modifications from time to time, to achieve its longterm
objectives.?
Trade policy is alternatively called as (EXIM) Export- Import policy. In India Trade
policy is a policy, which is adopted by a country with references to exports and imports.
FREE TRADE POLICY: A policy that doesn’t impose any constraints on the
interchange of goods and services between separate countries. A policy includes full
absence of tariffs, quotas; interchange constraints on production taxes and subsidies.
Case in favour of Free Trade
Most arguments for free trade have been built on the grounds of efficiency, economic
growth and welfare. According to Samuelson "trade promotes a mutually profitable
regional division of labour, greatly enhances the potential real national product of all
nations, and makes possible higher standards of living all over the globe"
Free trade policy is economically advantageous to the participating countries since it
maximizes their social product. Free trade is supposed to be carried out under the
conditions of free competition in which price mechanism "… automatically ensures that
each country, specialized in the production of those goods, and those goods which it
can produce more cheaply, talking account of transport (cost)". Given the real
resources of a country, if it specializes in the production of goods in which it is
relatively more efficient, or its cost of production is comparatively lower, its total
national product will be much larger than if it spreads its limited resources over the
production of all goods, irrespective of the cost of production. With specialization in the
efficient sectors, a larger national product can be achieved; a larger exportable surplus
can be generated; and a larger volume of goods & services of the country’s
requirements can be imported from other countries at lower prices. This increases total
availability of goods and services and raises the standard of living of the people.
Possibly the mist attractive argument in favour of free trade is that ‘it lowers the prices
of imported goods’. Moreover, free trade in international market has an ‘educative
effect’ in the sense that it compels countries to enhance their efficiency through better
management of resources and quick adoption of improved and more efficient
techniques of production.
In theoretical terms, free trade offers various MERITS in realistically below developed
countries where as DEMERITS in such a system of international trade. As an
inference, international economy survives a difficult period of protective trade policies.
Trade policies may be outward looking or inward looking.
(i) Outward looking: An outward looking trade policy encourages not only free trade
but also the free movement of capital, workers enterprises and students, a welcome to
the (MNC) organizations and an open system of communications
Primary outward Policies: Goaled at encouraging export of raw material and
agricultural.
Secondary outward Policies: Goaled at promoting manufactured exports
(ii) Inward looking: An inward looking true policy stresses the requirement for a
Country to its own style of development and to be the master of its own fate with
limitations on the movement of goods, services and people in and out of the Country.
Primary inward policies: Opinion is to get agricultural self-sufficiency
Secondary inward policies: By import substitution opinion is attaining
manufactured commodity self-sufficiency.
Merits of FREE trade
If free trade between nations did not exist, then economies would stagnate.
Free trade allows nations to flourish at what goods and/or services they excel at
providing, fits into this scenario like a hand to a glove.
Free trade gives consumers more, and cheaper, choices.
It also helps to facilitate co-operation between the weaker developing countries
and help the South build a joint economic perspective.
Demerits
FREE trade affects every country in the world and every section of society within
those countries.
Industries face stiff competition from foreign companies.
Small scale industries, which already have very less resources have to face high
competition.
Protection
For some political reasons most countries had adopted a projectionist policy. Perhaps
the world market never provided the perfect conditions required for free trade on a
global scale. For the purpose of regulating foreign trade or protecting a country’s
interest in foreign trade, tariff is one of the most important tools.
Merits
1. A protective trade policy by a country seeks to maintain a system of trade limitations
with the opinion of protecting the domestic economy from the competition of foreign
products.
2. During the decades of 50, 60 and 70 and some enhanced in 80. Protective trade
policy constituted a significant plank (part) in the commercial policies of below
developed countries.
3. It helps in development of the industries in the country.
4. Local industries don't have to face high competition from the foreign countries.
DEMERITS
Many undeveloped countries continue to have protective trade policies.
The product prices are high due to protective trade policies.
Consumers have to feel the heat of protective trade policies.
The economy can't grow at high pace.
It also discourages foreign investments.
In a developing country like India, we cannot have a full-fledged free trade policy due
to the following reasons:
Several industries in a developing country like India are in the initial stage of
industrial growth, most industries are in their infancy. In infant industries are
exposed to competition with the industries of developed nations, which have
achieved a high level of technical efficiency , economies of scale and financial
strength, they would run the risk of dying out in their infancy. The infant industries
of developing economy need protection.
Promotion of employment: Tariff protection is also suggested as an effective
remedy to the serious unemployment problem in underdeveloped countries.
Imposition of tariffs on imports directly competing with the domestic products helps
to expand employment opportunities in the import-competing industries by
securing the domestic market
reference exports and imports. It can be free trade policy or restricted trade policy. A
restricted trade policy seeks to maintain a system of trade restrictions with the objective
of protecting domestic economy from competition of foreign products. A free trade
policy involves complete absence of tariffs, quotas, exchange restrictions etc.
Thus, external sector management strongly influences the direction, trend and growth
of foreign trade of country. This is an important economic instrument, which can be
used by a, country, with suitable modifications from time to time, to achieve its longterm
objectives.?
Trade policy is alternatively called as (EXIM) Export- Import policy. In India Trade
policy is a policy, which is adopted by a country with references to exports and imports.
FREE TRADE POLICY: A policy that doesn’t impose any constraints on the
interchange of goods and services between separate countries. A policy includes full
absence of tariffs, quotas; interchange constraints on production taxes and subsidies.
Case in favour of Free Trade
Most arguments for free trade have been built on the grounds of efficiency, economic
growth and welfare. According to Samuelson "trade promotes a mutually profitable
regional division of labour, greatly enhances the potential real national product of all
nations, and makes possible higher standards of living all over the globe"
Free trade policy is economically advantageous to the participating countries since it
maximizes their social product. Free trade is supposed to be carried out under the
conditions of free competition in which price mechanism "… automatically ensures that
each country, specialized in the production of those goods, and those goods which it
can produce more cheaply, talking account of transport (cost)". Given the real
resources of a country, if it specializes in the production of goods in which it is
relatively more efficient, or its cost of production is comparatively lower, its total
national product will be much larger than if it spreads its limited resources over the
production of all goods, irrespective of the cost of production. With specialization in the
efficient sectors, a larger national product can be achieved; a larger exportable surplus
can be generated; and a larger volume of goods & services of the country’s
requirements can be imported from other countries at lower prices. This increases total
availability of goods and services and raises the standard of living of the people.
Possibly the mist attractive argument in favour of free trade is that ‘it lowers the prices
of imported goods’. Moreover, free trade in international market has an ‘educative
effect’ in the sense that it compels countries to enhance their efficiency through better
management of resources and quick adoption of improved and more efficient
techniques of production.
In theoretical terms, free trade offers various MERITS in realistically below developed
countries where as DEMERITS in such a system of international trade. As an
inference, international economy survives a difficult period of protective trade policies.
Trade policies may be outward looking or inward looking.
(i) Outward looking: An outward looking trade policy encourages not only free trade
but also the free movement of capital, workers enterprises and students, a welcome to
the (MNC) organizations and an open system of communications
Primary outward Policies: Goaled at encouraging export of raw material and
agricultural.
Secondary outward Policies: Goaled at promoting manufactured exports
(ii) Inward looking: An inward looking true policy stresses the requirement for a
Country to its own style of development and to be the master of its own fate with
limitations on the movement of goods, services and people in and out of the Country.
Primary inward policies: Opinion is to get agricultural self-sufficiency
Secondary inward policies: By import substitution opinion is attaining
manufactured commodity self-sufficiency.
Merits of FREE trade
If free trade between nations did not exist, then economies would stagnate.
Free trade allows nations to flourish at what goods and/or services they excel at
providing, fits into this scenario like a hand to a glove.
Free trade gives consumers more, and cheaper, choices.
It also helps to facilitate co-operation between the weaker developing countries
and help the South build a joint economic perspective.
Demerits
FREE trade affects every country in the world and every section of society within
those countries.
Industries face stiff competition from foreign companies.
Small scale industries, which already have very less resources have to face high
competition.
Protection
For some political reasons most countries had adopted a projectionist policy. Perhaps
the world market never provided the perfect conditions required for free trade on a
global scale. For the purpose of regulating foreign trade or protecting a country’s
interest in foreign trade, tariff is one of the most important tools.
Merits
1. A protective trade policy by a country seeks to maintain a system of trade limitations
with the opinion of protecting the domestic economy from the competition of foreign
products.
2. During the decades of 50, 60 and 70 and some enhanced in 80. Protective trade
policy constituted a significant plank (part) in the commercial policies of below
developed countries.
3. It helps in development of the industries in the country.
4. Local industries don't have to face high competition from the foreign countries.
DEMERITS
Many undeveloped countries continue to have protective trade policies.
The product prices are high due to protective trade policies.
Consumers have to feel the heat of protective trade policies.
The economy can't grow at high pace.
It also discourages foreign investments.
In a developing country like India, we cannot have a full-fledged free trade policy due
to the following reasons:
Several industries in a developing country like India are in the initial stage of
industrial growth, most industries are in their infancy. In infant industries are
exposed to competition with the industries of developed nations, which have
achieved a high level of technical efficiency , economies of scale and financial
strength, they would run the risk of dying out in their infancy. The infant industries
of developing economy need protection.
Promotion of employment: Tariff protection is also suggested as an effective
remedy to the serious unemployment problem in underdeveloped countries.
Imposition of tariffs on imports directly competing with the domestic products helps
to expand employment opportunities in the import-competing industries by
securing the domestic market
Question. 5)Collect data on foreign technical and
financial collaborations for the period 2005-2012 and write a note on the
trends of these collaborations.
Ans :
Developing countries like India have been
using import of technology through
foreign collaboration as a strategy to bridge the technological gaps in the country, to
expedite economic development.
The number of foreign collaborations has been increasing on a cyclical manner in the
first forty years, from 1951-91, starting with a meager 44 collaboration in the year 1951,
it increased to 592 in the year 1961 and then suddenly to 402 in 1962, the year in
which India faced war with China. The number of collaborations hovered around the
same figure. until 1965, when India faced war with Pakistan, when number dropped
further to 343. This was followed with further decline due to political turmoil and rapid
changes in government policies, marked with stricter regulatory requirements. The
trend continued more or unchanged during 1970s, when the country underwent
dramatic changes is political arena, with the imposition of emergency followed by short
lived Janata Party government at the Centre. Eighties, however, saw the return to the
rising trend, which became steeper and steeper in the 1990s, Total number of
collaborations in the eighties equaled the total number of collaborations in the three
decades of 1950s, 1960s and 1970s. The period 1991-2000 saw total number of
collaborations in the decade surpassing the total number of all the collaborations in the
4 decades preceding it. Indeed, the total number collaborations in the 9 years of postliberalization
(1992-2000) period is observed to be 17810, while in the 41 years of preliberalization
(1951-91), there were only 15105 foreign collaborations. India is thus
banking on expert technological support for goods and services at an accelerated pace
than in the pre-liberation era. The rise in number is substantial in the post liberalization
era, 10-fold compared to the decade of 1950s, 5- fold compared to the decades of
1960s and 1970s and 2-fold compared to the decade of 1980s.
An interesting development is observed in terms of number of countries with whom
India has foreign collaborations.
In the 41 years of pre-liberalization era, the foreign collaborations were limited to 25
countries only. In the post liberalization era, the number of countries, with whom India
has entered into foreign collaboration, swelled to 112, a dramatic over 4-fold rise
indeed. It would be noticed from the table 2 that the number of countries with whom
India has very large number of collaborations (more than 1000 each) during the 41
years of preliberalisation era (1951-91) and the 9 years of post- liberalization era
(1992-2000) has not changed substantially, except that NRIs have engaged in a big
way in the post liberalization era.
The approvals of foreign collaborations have been classified in two classes; namely
technological (without foreign equity participation) and financial (having Foreign equity
participation).
foreign collaboration as a strategy to bridge the technological gaps in the country, to
expedite economic development.
The number of foreign collaborations has been increasing on a cyclical manner in the
first forty years, from 1951-91, starting with a meager 44 collaboration in the year 1951,
it increased to 592 in the year 1961 and then suddenly to 402 in 1962, the year in
which India faced war with China. The number of collaborations hovered around the
same figure. until 1965, when India faced war with Pakistan, when number dropped
further to 343. This was followed with further decline due to political turmoil and rapid
changes in government policies, marked with stricter regulatory requirements. The
trend continued more or unchanged during 1970s, when the country underwent
dramatic changes is political arena, with the imposition of emergency followed by short
lived Janata Party government at the Centre. Eighties, however, saw the return to the
rising trend, which became steeper and steeper in the 1990s, Total number of
collaborations in the eighties equaled the total number of collaborations in the three
decades of 1950s, 1960s and 1970s. The period 1991-2000 saw total number of
collaborations in the decade surpassing the total number of all the collaborations in the
4 decades preceding it. Indeed, the total number collaborations in the 9 years of postliberalization
(1992-2000) period is observed to be 17810, while in the 41 years of preliberalization
(1951-91), there were only 15105 foreign collaborations. India is thus
banking on expert technological support for goods and services at an accelerated pace
than in the pre-liberation era. The rise in number is substantial in the post liberalization
era, 10-fold compared to the decade of 1950s, 5- fold compared to the decades of
1960s and 1970s and 2-fold compared to the decade of 1980s.
An interesting development is observed in terms of number of countries with whom
India has foreign collaborations.
In the 41 years of pre-liberalization era, the foreign collaborations were limited to 25
countries only. In the post liberalization era, the number of countries, with whom India
has entered into foreign collaboration, swelled to 112, a dramatic over 4-fold rise
indeed. It would be noticed from the table 2 that the number of countries with whom
India has very large number of collaborations (more than 1000 each) during the 41
years of preliberalisation era (1951-91) and the 9 years of post- liberalization era
(1992-2000) has not changed substantially, except that NRIs have engaged in a big
way in the post liberalization era.
The approvals of foreign collaborations have been classified in two classes; namely
technological (without foreign equity participation) and financial (having Foreign equity
participation).
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