Protectionism vs. Free Trade

1. Protectionism vs. Free Trade

2. Background • All Governments Regulate Foreign Trade. • The amount of regulation is widely debated.

3. What is Protectionism? • Government actions to protect local or domestic industries from foreign competition.

4. What is the Alternative? • Free Trade • Free trade is an open trading system with few limitations and little government involvement.

5. Arguments for Protectionism • Protects domestic jobs by compensating for foreign company’s use of cheap labor. • Used by industrialized countries • Used by industries that stand to lose • Political interest groups often push for legislation to restrict trade • New or Infant industries must be protected so they can grow sufficient to compete globally. • Industries critical to national security should be protected.

6. Arguments for Protectionism • Local producers of goods pressure the government for protection from foreign competition. • Countries don’t want to be dependant on other nations in the event of war. Protect industries considered vital. • Less developed nations believe protectionism promotes industrial growth in their own nation.

7. Methods of Protectionism • Tariffs (Duties) – A tax on an import which raises the cost of the product to the importer, which discourages consumers from buying the product. Most common. • Licensing Requirements – Forces companies to have a license to import a product. This license can be withdrawn at any time.

8. Methods of Protectionism • Quotas – A limit on the quantity, or monetary amount, of a foreign good that can be imported annually. • Boycotts – Government issues an absolute restriction on certain products from certain countries • Voluntary Restraint Agreements – The exporting government agrees to limit the quantity of their export of a certain product.

9. Methods of Protectionism • Embargo - A prohibition of trade, both imports and exports, with a specific country. • Subsidies – Payments by the government to an industry • MFN Status – Assures a country that no other country will get lower tariffs when exporting to the U.S. • Health, Environmental, & Safety Standards - Forces imported goods to meet certain standards which may add to their cost.

10. Free Trade

11. Arguments for Free Trade • Consumers benefit by lower prices and a greater supply of goods and services. • Foreign trade and increased competition forces companies to modernize plants, production techniques and technology. • Protectionist measures bring about retaliation by foreign governments.

12. Arguments for Free Trade • Free trade fosters an environment that encourages investment and entrepreneurship. • Businesses are not fearful that the government may restrict access to the market. • Protected new or infant industries often never “grow up”. They rely on protectionism and never become competitive.

13. The End

14. Resources • The Basics of Foreign Trade and Exchange, www.ecedweb.unomaha.edu