Essay Plans

If free trade is so advantageous why has there been an increase in demands for protectionism in recent years?

SYNOPSIS:

Explain free trade and theory of comparative costs. Using a numerical example show the advantages; mention broader advantages, eg political. Briefly illustrate different types of protectionism and support with examples of who (and why) is asking for protectionism.

POINTS:

  1. Trade will take place between two countries if it is mutually beneficial, ie it increases the welfare of both parties concerned.

  2. Explain absolute and comparative advantage and show how it is the principle of comparative advantage that is important.

  3. Note, however, that in the trade pattern for cars, for example, we import the same types of cars that we export - illustrating product differentiation rather than comparative advantage.

  4. Illustrate different types of protectionism:

    1. VER's Voluntary Export Restraint
    2. Tariffs
    3. Embargoes
    4. Quotas
    5. Administrative restrictions
    6. Exchange controls
    7. Import Deposit schemes

    The above should be supported by a diagram showing the imposition of tariffs.

  5. The most frequent reason for protectionism advanced in recent years has been because of 'unfair' competition. (Other reasons include the infant industry argument, to allow a nationalised industry to decline gradually or impose sanctions for political reasons - South Africa, Russia etc).

  6. In the 1980s industrial nations have used non-tariff barriers to protect employment (VER's against Japan in 1981 - to do with the car market) or the reduce the Balance of Trade/Payments deficit.

  7. Another argument is that UK is going through structural change - from manufacturing to tertiary - and thus protectionist measures can be used to smooth blips (eg. inflation rate of 8.3%) during transition.

  8. Points 5, 6 and 7 should be supported by the following points:

    1. Under article 6, GATT allows retaliatory sanctions to be applied if it can be shown that the subsidised price (ie. below the real cost of production) materially affects domestic industry.

    2. In 1985 the European Commission imposed a 53% anti-dumping duty on Yugoslavia who were exporting copper sulphate.

    3. Article 18 of GATT allows protection. Strategic reasons may support the UK's protection of the steel industry.

    4. The Cambridge Economic Policy Group advocate protectionism as part of a recovery strategy. With this recovery comes increased demand and thus more imports - even with controls - than there would be if the recession in the UK deepened. (For a fuller discussion of this see pages 455-457 of Applied Economics by Griffiths and Wall. Third Edition).

  9. Finally, a brief mention of the criticisms of protectionism - other than the arguments in support of freetrade - to mention the possibilities of retaliation, infringement of EEC, GATT and the spirit of 1992, plus the misallocation of resources - refer back to your numerical example in (2).
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