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PROTECTIONISM AND FREE TRADE
The majority of economists believe in the comparative cost principle, which proposes that all nations will raise their living standards and real income if they specialize in the production of those goods and services in which they have the highest productivity. Nations may have an absolute advantage in producing goods or services because of factors of production (raw materials), climate, division of labour, economies of scale.
This theory explains why there is international trade between North and South, e.g. coffee is going from Brazil to the USA, and semiconductors – in the opposite direction. But it does not explain the fact that 75% of the export of the advanced industrial countries goes to other similar advanced countries, with similar resources, levels of technology, education and capital. It is more a historical accident than a result of natural resources that the US leads in building aircraft, semiconductors, computers and software, while Germany makes luxury automobiles, machine tools and cameras.
However the economists who recommend free trade do not face elections every four or five years. Democratic governments do, and that encourages them to impose tariffs and quotas in order to protect their strategic industries. Other reasons for imposing tariffs include the following:
¾ to make imports more expensive than home-produced substitutes;
¾ as a protection against dumping (selling goods abroad at below cost price in order to destroy or weaken competitors);
¾ to retaliate against restrictions imposed by other countries;
¾ to protect ‘infant industries’ until they are strong enough to compete internationally.
With tariffs, it is impossible to know the quantity to be imported, because prices may be elastic. With quotas, governments can set a limit to imports. Other non-tariff barriers that some industries use include so-called safety norms and creation of customs difficulties and delays.
1. What is the comparative cost principle?
2. When may nations have an absolute advantage in producing goods or services?
3. Is it a result of natural resources or a historical accident that Germany, for example, makes luxury automobiles, machine tools and cameras?
4. Why do governments impose tariffs and quotas?
5. Are there any other non-tariff barriers that countries use?
Complete the following sentences to summarize the text above:
The majority of economists believe in … .
Nations may have an absolute advantage in producing goods or services because of … .
This theory explains why … , but it does not explain the fact that … .
Economists who recommend free trade do not face … .
Tariffs and quotas are imposed in order to … .
Other non-tariff barriers include … .
Why do you think many developing countries try to reduce protectionism and increase their international trade?
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