Arguments against free trade

These are arguments put forward to justify putting restrictions on free trade. For example, import tariffs or quotas.

 

  1. Infant industry argument

If developing countries have industries that are relatively new, then at the moment these industry’s would struggle against international competition. However if they invested in the industry then in the future they may be able to gain Comparative Advantage.

    • This shows that comparative advantage can change over time
    • Therefore protection would allow them to progress and gain experience to enable them to be able to compete in the future.
    • more on infant industry argument
  1. The Senile industry argument

If industries are declining and inefficient they may require large investment to make them efficient again. Protection for these industries would act as an incentive to for firms to invest and reinvent themselves. However protectionism could also be an excuse for protecting inefficient firms

  1. To diversify the economy

Many developing countries rely on producing primary products in which
they currently have a comparative advantage. However relying on agricultural products has several disadvantages

    • Prices can fluctuate due to environmental factors
    • Goods have a low income elasticity of demand. Therefore with economic growth demand will only increase a little
  1. Raise revenue for the government.

Import taxes can be used to raise money for the government however this will only be a relatively small amount of money

  1. Help the Balance of Payments

Reducing imports can help the current account as it restricts imports. However in the long term this is likely to lead to retaliation and also cause lower exports so it might soon prove counter-productive.

  1. Cultural Identity

This is not really an economic argument but more political and cultural. Many countries wish to protect their countries from what they see as an Americanisation or commercialisation of their countries

  1. Protection against dumping

Dumping occurs when a country has excess stock and so it sells below cost on global markets causing other producers to become unprofitable. The EU sold a lot of its food surplus from the CAP at very low prices on the world market; this caused problems for world farmers because they saw a big fall in their market prices. Other examples include allegations that China has been dumping excess supply of steel on global markets causing other firms to go out of business.

  1. Environmental

It is argued that free trade can harm the environment because LDC may use up natural reserves of raw materials to export. Also countries with strict pollution controls may find consumers import the goods from other countries where legislation is lax and pollution allowed.

  • However supporters of free trade would argue that it is up to individual countries to create environmental legislation

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