Question

Which theories of trade support government intervention in trade? Discuss their rationale.

Discuss the political and economic arguments used by governments to justify the use of various trade policy instruments (tariffs, quotas, VERs etc.).

Answer 1

Ans 1=New trade theory suggests that a vital factor in ascertaining international trade patterns are the very considerable economies of scale & network impacts which can happen in key sectors.

New trade theory states that the state might have a role to play in fostering new industries & backing the growth of main sectors. Few point to the Japanese automobile sector in the 1950s, which obtained substantial governmental support. Other S.E. Asian nations also had some governmental protection .

A developing nation may require tariff protection & national subsidy to promote the creation of capital-intensive sectors. If the industry gets support for some years, it will be able to take advantage of the economies of scale & then be competitive minus governmental support.

Ans 2=

1. Safeguarding local industries- Tariffs are levied on imports so as to protect domestic industries from collapsing. They dissuade international industries from importing cheaper products from abroad thus, protecting domestic industries.

2. Saving jobs- Tariffs play an essential role in protecting domestic jobs. By levying tariffs, cheaper products from foreign nations are restricted thus, promoting domestic industries which results in creation of more employment.

3. Fair play- Tariffs play an essential role in fostering fair play between nations. It makes it easier for economies to grow their industries to the level of other nations.

4. Additional revenue for the government- Tariffs augment the tax charged on commodities being imported into the nation & this raises the revenue accumulated by the government.