Trade Policy Controversies

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Protectionism is the economic policy of restraining trade between countries through the use of tariffs, quotas and other regulations. It is designed to discourage imports and prevent foreign take-over of domestic markets and companies.

Arguments for Protectionism

Protectionists believe that there is a legitimate need for government restrictions on free trade in order to protect their country's economy and its people's standard of living.

Some of the arguments include:

  • The theory of Comparative Advantage has lost its relevance in a globally integrated world.
  • Domestic tax policies may create a disadvantage for domestic firms if free trade is allowed
  • Infant industry needs government protection
  • Unrestricted trade undercuts domestic policies for social good

Arguments against Protectionism

Most mainstream economists criticize protectionism. According to comparative advantage theory, gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage.

Free trade is believed to help workers in developing countries even though they are not subject to the stringent health and labor standards of developed countries. This is because the growth in manufacture has a ripple effect throughout the economy that creates competition among producers, lifting wages and living conditions.