Question

Explain the measures that a country can take to protect itself from the negative aspects of free trade.

Answer 1

Solution:

There are various measures adopted by the countries to protect themself from negative effects of trade.

Trade simply means exchange of goods between mutiple countries.It takes place due to imbalance in supply and demand for a good (or) due to competitive advantage in producing a particular good (or) service.Both the importing and exporting countries benefit either (or) and in the 2 forms as said before.

There is no negative aspect of trade for any country until there is a balance between it's imports and exports.The difference comes up when their imports are increasing rapidly but their exports are not increasing /increasing at a much slower pace.Due to this their(importing countries') financial position (for example in the form current account deficit ) worsens as the balance of trade becomes unfavourable.The importing country tries to tackle this situation by using the following techniques.These are also called protectionist measures.The following are the 4 main methods followed:

1. Impose tariffs on imported goods:This method is adopted generally by those countries which have huge imports, generally highly developed countries like U.K,U.S etc., Due to this there would be immediate rise in the prices of the imported goods which would make them less competitive and so reduce their demand.Ex:U.S has recently imposed tariff on steel imported from China. The U.S has been importing steel from China as their cost of production is nearly 3 times that of China.

2.Subsidizing the local industries: Here the goverment decides to subsize the local industries inorder to the strengthen the industrie(s) and make them competitive in the global market.Example : In developing countries like India,the governement provides subsidies on fertilizers inorder to increase the productivity which thereby leads to reduction in the price of the produce.These subsidies can also be in the form of tax credits (or) direct cah benefits.So the goods become globally compettitive.

3.Currency Manipulation : This method is followed by some countries.They try to manipulate their exchange rates of their currencies.Ex : China follows a fixed exchange rate system.Foreign exchange rate should be left free to adjust according to the supply and demand for it's currency in the market.So in this process it's exports remain competitive in the global market.

A country can try to keep it's currency value higher or lower inorder to gain advantage depending on whether it is importing(or) exporting.

4."Quota imposition on Goods" : A country imposes a quotas i.e., restricts the amount of goods that can be imported from the other countries.So in a way to stabilize the demand for the local industry.

Other duties like "anti- dumping" duties (which can be considered as a form of import duty) etc., are also imposed.What ever the terminology used may be,the above 4 are the main ones.

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