What is meant by free trade and give arguments in favor or against him?

Answer 1

Arguments against Free Trade

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 govt.

Import taxes can be used to raise money for the govt however this will

only be a small amount of money

1. Help the Balance of Payments

Reducing imports can help the current account. However in the long term this is likely to lead to retaliation

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

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

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