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What are the reasons for governments to restrict free trade? Are these valid in the 21st century?

Essay 2012 11 Pages

Business economics - Trade and Distribution

Excerpt

1. Introduction

The term “free trade” has different meaning to different interest groups. It is because of the different lenses through which people view events around them, the free trade debate is so complex. Although the economists have a notorious reputation for disagreeing about everything, one thing that almost all economists have always agreed is the desirability of free trade. However, it is a well-known fact that when it comes to matters of trade policy, it is all about politics and not about proven economic benefits of free trade, mainly due to political blindness and serving the needs of well-organized special-interest groups.

The purpose of this paper is therefore to shed light on the reasons for which government might restrict free trade and then analyse why these reasons are not valid in the 21st century.

2. Common arguments for trade barriers

Demand for the continuation of trade restrictions continues to be part of the public debate. More common arguments in favour of trade barriers are evaluated below with their likely economic effects.

2.1 Protect infant industries

Infant industry argument suggests that embryonic industries often do not have the economies of scale that their matured competitors from other countries may have, and thus need to be sheltered under government’s temporary protection until they can attain that level (Chang, 2002, p. 15). The government establishes a rent redistribution mechanism from domestic consumers to local producers by establishing trade restriction that is related to the efficiency level of the domestic industry relative to the foreign one that may help local industry to overcome initial cost advantage and thus survive in the long run (Miravete, 2008, p. 1).

The generation of new ideas has central economic importance for economic well-being of a nation. However, as explained by Elwell (2006, p. 14), since an idea can have limited excludability, it can be difficult for the firm to fully appropriate the economic benefits of the idea it has created. Because of the spill-over effect it may easily benefit other enterprises without compensating the innovator. A firm may not have the incentive to invest in the knowledge-creating process that would benefit the whole society without some sort of government protection.

Infant industry argument is not a static, but highly dynamic in nature as it does not mention for how long the protectionist attitude of government would continue and when it would cease to exist allowing the industry to be subjected to foreign competition. The primary objective behind this argument is to create a level playing field between industries producing similar products but at asymmetrical efficiency level.

Trade restrictions based on this ideology is more often imposed by the developing or the under-developed countries which possess comparatively outdated industries. Infant industry protection was successfully implemented in Japan after World War II that has inspired many Latin American and Asian countries with varying degrees of success (Miravete, 2008, p. 2).

2.2 Defend national security

Trade restrictions are implemented to protect certain industries that are deemed tactically important for the safeguard of national security. Defence industries most often receives significant level of protection as it is viewed as crucial to national interest. For example, while both Western Europe and the United States are fairly open to trade, both are very protective of their respective defence-oriented industries.

Another matter of concern that often compels the policymakers of developed countries to restrict free trade is technological change. Free trade is rare for military technology and most often, restriction is placed on advanced technology developed by non-military authority, because trade in high-tech equipment can facilitate the implementation of advanced military technology in countries that may become strategic opponent in the near future. This argument is often brought up in the context of United States-China trade relations. If the Chinese economy continues to grow in the way it is doing now, it would be able to harness economic resources four-fold what the United States economy could, and accordingly proportional military resources (University of Plymouth Students’ Union, 2012, p. 1).

2.3 Protect domestic employment

One of the most common justifications for trade restriction is to protect domestic jobs that could arise from the possibility of heightened competition from imported goods. The effect of this competition is twofold. When domestic consumers purchase imported goods rather than domestic production, domestic employment declines with the declination of domestic production. On the other side, domestic producers may shift production facility abroad to minimize the cost of production, which leads to higher unemployment in the domestic country. Very often the justification is highly politicized derived from the idea that production is provided by the citizens of the country who pays tax and has voting rights, rather that foreign workers.

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Details

Pages
11
Year
2012
ISBN (eBook)
9783656249719
ISBN (Book)
9783656249900
File size
469 KB
Language
English
Catalog Number
v197078
Institution / College
University of New England
Grade
Tags
what

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Title: What are the reasons for governments to restrict free trade? Are these valid in the 21st century?