Question

Benefits and Costs of government intervention in free trade.

Answer 1

Free trade is a concept wherein the trade happens without any barriers, restrictions purely based on demand and supply terms.

This is a highly debated issue, as to whether economies across the world should shift to this type or not.

Main Benefits of Government Intervention in Free Trade:

1) Safeguarding local traders: This often happens in developing economies. The local traders would still be in a fragile stage.If the Government opens up the economy to all the players, the Multinational companies with huge advancement in Research and Development would try to grab all the market share and will lead to the closure of locally made goods.

2) Containing Power: Allowing free trade could lead to the increase of power in hands of few, This could lead to a situation where the individual companies would be playing a major role in running governments. If this happens, the country would fall into wrong hands, as the main concern of these companies would be to make a profit and not welfare

3) Illegal Trade: If the free trade is allowed, it could lead to a situation where illegal trade like flesh trade, drugs trade, and animal trafficking would be increasing. To control such a situation government intervention becomes very crucial.

Major Cons of Government Intervention of Free Trade:

1) Lack of Choice: Imagine if a country blocked all its imports. The consumers now have to buy everything which is locally made. This might lead to two things - a) Consumers don't have a choice to choose among various options and have to pay whatever is charged by the trader. b) The trader would not have any competition and would become complacent towards innovation and service delivery

2) Hurts fair Competition: Imagine a situation where there are 2 companies, both sell similar products, but one imports the product and the other makes it in the country. The product is quite similar and is comparable in terms of price as well. One day, the government imposes an additional tax on the imports of goods. Now, though both the goods are same both in terms of quality and price, now the importer has to increase his price because of the new tax. This would lead to him losing his market share.