Free Trade

Free Trade n Free trade is a policy by which a government does not discriminate against import or export, and it does not imply that a country abandons all tariffs and duties of imports and exports. The conceptual case for free trade is based on an argument that the division of labor among countries leads to concentration, greater effectiveness, and higher output. Benefits of Free Trade n Free trading partners are less likely to go to war with each other n A nations capital and labor resources can be used in a open market n Free trade promotes economic growth n Creates jobs faster in companies Protectionism n Protectionism is the policy of protecting domestic industries against foreign competition by means of tariffs, subsides, import quotas, or other restrictions or handicaps placed on the imports of foreign competitors. to spite the fact that the world economy benefits more from free trade many countries still implement protectionism policies The Arguments Against Protectionism n Provides large benefits to a small number of people n Causes consumers a loss in that they pay higher prices n Increases inefficiency n destroys more jobs than it saves n decreases global competition The Monetary and Non-Monetary Costs Of Protectionism n Textiles n Textiles protectionism in the textile industry has cost poor families almost 9% of their disposable income. n It destroys more jobs than it saves.

n Quality may decline if higher quality products become less available or totally unavailable as a result of protectionism. n It causes loss of individual rights. n Protectionism cost between $50,000-$134,686 a year for each textile job saved. The Monetary and Non-Monetary Costs Of Protectionism n Auto n Export restrictions on automobiles cost consumers about $14 billion. n Quota rents can raise prices because auto quotas have been estimated to be n $2.2 billion and $7.9 billion a year.

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n Import quotas added $2,400 to the price of a Japanese car. n The annual cost of quotas was $241,235 per auto job saved. n Dairy n The dairy industry estimated a loss caused by protectionism of $1.4 billion. n Quota rents cost $250 million a year. Chile and Free Trade n Chile has few trade barriers.

n Under Chilean tax laws, local and foreign companies are treated equally. n Chile imposes a 10% tariff rate, which is low compared to the rates of most countries. n The Chilean trade industry will start cutting tariffs by one percentage point per year n Bringing it down to a flat 6% by 2003, and reducing the tariff, by one percentage point per year and will achieve a zero tariff by 2010. n Chile also has two free trade zones, one in each of the extreme northern and southern regions of the country. Rice Imports and Exports Japan and Protectionism n The Japanese market is one of the hardest industries to do business.

n The Japanese system of trade is a very good example of protectionism. n Japan has always been very protective of certain domestic markets. n Japanese consumers pay five times the world price for rice because of import restrictions protecting Japanese farmers. Rice Imports and Exports in the Japanese Market Conclusions: Free Trade or Protectionism? The conclusion, then, is that there is no easy solution. The best solution, from an objective perspective, is total free trade, regardless of the consequences.

This solution would return the servant theory of government, the view that government should be the servant of the people — the protector of life, liberty and property — and not a redistribute of wealth. Total and immediate free trade would also cause resources to be reallocated to more productive uses faster, whereas a gradualist approach would halt this shifting of resources.


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