In modern times the role of international trade is vital for the socio-economic development of developing countries.
After the Second World War, the world witnessed considerable growth in industrial and agricultural products, an increase in world population, and a significant increase in volume and value of international trade.
It is estimated that during the period between 1950-70, International business has expanded at least five times. Because during this period, several new states gained independence.
No country in the world today can claim that it can fulfill all the needs of its citizens from the domestic resources alone.
Even superpowers like the USA and the former USSR rely considerably on foreign trade. International trade plays a crucial role in the overall development of the world.
There are two groups of economists. One favors free trade, and the other is against it.
Arguments In Favour Of Free Trade
The classical economists are in favor of the free trade policy. They give the following arguments in favor of free trade.
#1. Maximization Of Output
This group holds that free trade maximizes the output. It produces competition among the trading partners of the world.
Because in free trade, there are no trade restrictions that create hurdles in competition among the member countries.
#2. Optimum Utilization Of Resources
Supporters of free trade believe that free trade leads to effective utilization of the existing resources.
Because through free trade, developing countries can export their raw material to other countries of the world. Thus free trade leads to optimum utilization of resources.
#3. Educative Value
Free trade has an educative value. The international competition encourages home products, which provides an opportunity for poor people to earn income to fulfill their basic needs. It educates common people in the field of international trade.
#4. Wide Market
Free trade leads to a vast extent of the market for goods, as the demand for goods is not confined to one country but to a number of countries.
The entire world becomes the market for all types of goods. This leads to producing quality goods at low prices because of world competition.
#5. Prevent Monopolies
Free trade prevents the establishment of monopolies. Under free trade, each state tries its best to participate in international trade.
So in free trade, all goods, raw materials, and products are in free movement among the trading partners. So there is no chance of monopoly.
#6. Economic Development
Economic development is the foremost goal of every state of the world because it leads society towards political stability and social development.
So economic development is possible only when there is free trade. Economic development is the process that affects not only economic relations but also social, cultural, and political ones.
#7. Importation Of Foreign Capitals
International trade provides the basis for importing foreign capital in less developed countries.
Foreign trade facilitates the smooth foreign capital flow from the rich to the developing countries.
#8. Exchange Domestic Goods With Foreign Goods
International trade helps to exchange domestic goods with highly sophisticated goods.
It exchanges the goods of developing countries with developed countries of the world.
The term protectionism refers to a policy whereby domestic industries are protected from foreign competition.
The aim is to impose restrictions on the imports of products to encourage domestic enterprises to produce highly qualitative products.
Import duties raise the price of foreign goods by more than the price of household goods or may be protected by quotas or other non-tariff restrictions, making imports of foreign goods challenging to reach the domestic markets.
Arguments In Favour Of Protectionism
Following are the important arguments of protectionism.
#1. Bargaining Arguments
It is argued that the imposition of tariffs is necessary to bargain or trade negotiations with other countries.
Since international trade is based on a reciprocal basis, Tariff is used as a weapon to persuade other countries to lower their tariff wall.
So protectionism plays a very important role in bargaining in trade.
#2. Anti Dumping Arguments.
Protectionism is advocated against the practice of dumping. Dumping means selling products in a foreign market at a lower price than in the home market.
So through protectionism, a high Tariff is imposed on foreign goods and products. As a result, the costs of the products rise in the importing countries and remove the threat of dumping.
#3. Diversification Arguments
Another argument advanced in support of protectionism is to diversify the domestic industries.
It means that there should be balanced growth of the economy. So that all the sectors of the economy should be developed side by side.
For this purpose, agricultural and manufacturing industries should be protected from foreign competition.
#4. Balance Of Trade Arguments
The balance of trade argument is based on the notion that a country should impose a Tariff to have a surplus of exports over imports.
Such a surplus brings balance into the country, so the excess of exports raises employment and income through expanding the exports sector and the decline in imports by imposing Tariffs. As a result, more jobs and income are generated.
#5. Employment Argument
Protectionism creates employment opportunities at home when all the country’s sectors develop.
As a result, job opportunities increase in the country. Due to this, the standard of living is uplifted, and the country’s production is increased day by day.
#6. Keeping Money At Home Argument
This argument means that when we buy manufactured goods from abroad, we get the goods, and foreigners get the money.
When we buy the manufactured goods at home, we get both the goods and money.
#7. Expanding Home Market Argument
According to this argument, protection should be given to new industries and workers because it creates a great and promising market for all domestic products.
This would expand the home market for all household products, including agricultural commodities. As a result, production at home is enhanced.
#8. Equalization Costs Of Production Argument
The protection of domestic industries is advocated for equalizing costs of domestic and foreign products production.
For example, if the domestic cost is higher than the foreign cost by 25%, an import duty of 25% should be imposed on foreign products.
Thus, protectionism equalizes the cost of domestic and foreign goods and could compete on equal terms.
#9. Defense Argument
A country should adopt the policy of protecting its industries from the point of national defense.
If the country is dependent on other countries for its requirements of agricultural and industrial products, it will be very harmful to its national interests and security in a time of war.
For example, the USA stopped all sorts of supplies to Pakistan. 1965 war between India and Pakistan.
#10. Preservation Argument
According to protectionism, free trade is very harmful for the preservation of security, agriculture, ideology, etc.
According to protectionism, protection provides preservation to the factors mentioned above.
#11. The Infant Industry Argument
The argument favoring the infant industry claims that only by Tariff an optimum allocation of resources can be secured in certain circumstances.
The argument is that in a free trade situation, a country may never have a chance to develop the production and export of certain products which has a potential comparative cost advantage because established foreign producers have an early start.
Thus, the infant industry argument claims that the world as a whole will benefit from a temporary tariff in the long run.
It would be impossible for newly independent or developing countries to compete with the industrialized and developed countries.
In this situation, a tariff might be necessary to establish industry in the country where it has a potential cost advantage.
#12. Exchange Control Argument
Exchange control certainly has a more significant impact on a country’s balance of payments.
Exchange control has the additional advantage of controlling invisible transactions, capital movements, and visible transactions.
Trade restrictions are operated through the trade ministry, while exchange control is usually conducted by the Central Bank working through the commercial banks.
An exchange control system involves rationing foreign exchange either by price or by allocation procedure.
The arguments may or may not involve deliberate discrimination between types of transactions or geographical areas.
But the exchange control system is open to abuse where the administration lacks integrity and efficiency.