Question

Explain the concept of international trade while detailing the four different arguments against free trade and give an example for each argument. In your opinion explain which argument makes the most sense in terms of why international trade should be limited.

Answer 1

Following arguments are made against the international trade:

• Infant industry argument: Developing countries does not have well developed industrial base and firms of developing countries cannot compete with firms from developed countries. Thus, initially these infant industries are in need of protection to become stronger to compete with firms from developed countries in near future. Hence, there must be trade restrictions.
• Balance of payments: developing countries suffer the problem of balance of payments. Import is more relative to the export. Hence, it is recommended to impose some forms of tariff and taxes on unbridled imports from developed countries.
• Diversify economy: developing countries specialize in primary products and import essentially industrial and capital goods. Trade restrictions are recommended so that developing countries could develop well diversify production base and may escape dependency on developed countries.
• Raising government revenue: government can raise its revenue base by imposing taxes and tariffs on imports of goods and services.

Infant industry argument is most appealing and official in present world of international trade. Industries in developing countries must be protected against the undue competition and development of these infant industries would protect jobs and would help to diversify industrial base of developing countries. Furthermore, infant industries would reduce the vulnerabilities of developing countries.