Free trade vs Protectionism

Free trade vs Protectionism

No country in the world is self reliant and has to depend on other nations to meet the demands of its infrastructure and economy. Trade between countries is as old as civilizations but of late there has been a debate over the pitfalls of protectionism and the benefits of free trade between countries. Before differentiating between free trade and protectionism, we need to learn a bit about protectionism.

What is Protectionism?

Protectionism refers to policies, rules and regulations that help a nation place barriers in the form of tariffs while trading with any other country. It is sometimes also a ploy by a country to safeguard the interests of its domestic producers as cheap imported commodities tend to shut down factories making that commodity inside the country. Though at times protectionism is adopted to serve national interests, there are times when countries cry foul as they face non economic tariffs. For example, carpets made in India are world famous and India exports them to many countries including Europe and the US. But suddenly US chose to place barriers in this trade citing use of child labor in the manufacture of carpets in India.

One of the easiest ways to reduce imports of commodities is to raise the price of imports by putting in place tariffs. This helps domestic producers as they remain competitive in the domestic markets. Other ways of protectionism are to place quota restrictions on commodities so that the quantity entering the country is miniscule which does not affect local producers.

What is Free Trade?

The concept of Free trade on the other hand refers to a situation where there are no barriers in trade between two countries. This not only helps both the nations, it also paves the way for cooperation and trade in more areas and removing mistrust and ill will that is always there in an atmosphere riddled with sanctions, tariffs and embargos. Free trade does not take place overnight and this is why nations are entering into economic pacts and agreements to slowly and gradually remove all such artificial tariffs. Free trade encourages transparency and healthy competition. Nations have come to realize that others can be superior to them in production of certain goods and services while they can be superior in other areas.

To help nations of the world prosper through international trade, GATT has paved the way for World Trade Organization that sets the guidelines for international trade and puts into place a robust mechanism for the resolution of disputes between member countries.