Lu Lu                                                                                                                               6500354

If free trade is so advantageous to everyone, why have many countries attempted to increase protection for their own industries and farms in recent years?  

Free trade is the situation where there are no restrictions on trade between nations, such as tariffs, import quotas and other barriers. According to Mankiw (2004: 183), free trade definitely increases the total social welfare but also creates the winners and losers.  The significance is that the gains of the winners exceed the losses of the losers, thus the total surplus for one country still increases (ibid.).  However, the debate of whether to support free trade has not stopped. People who support free trade consider it will maximise the total welfare while others argue that it may threaten the national economy, especially in developing countries, since the world marketplace is not as perfect as the supporters have estimated.  They also claim that appropriate protection could keep the social stability and maximise national income. This essay will examine the main reasons of protectionism from four arguments: infant industry, strategic trade theory, job crises and unfair competition.

Protectionism is the process of government economic protection for domestic industries by establishing trade barriers or subsidising domestic producers (Bannock, et al. 2003: 314). The old argument for protectionism is the ‘infant industry’ argument, which is raised by Friedrich List who claims that a country entering early stages of industrialisation is absolute weaker than those nations that have been already well developed (List, cited in Ebeling, 1994). This country, therefore, should provide a less competitive environment with protection, such as subsidies, tariff and import quota, to promote its industrial development. According to List, even the economically advanced nations developed their early industries under such protection (Lipsey and Chrystal, 2004: 616).  South Korea, for instance, had enacted several policies to promote its domestic automobile industry in the 1950s. The import of completed cars was prohibited while the export of domestic automobile was strongly encouraged by the tax exemptions (Green, 1992: 411-415). However, economists are often worried about the permanent protection of certain industries (Mankiw, 2004: 190). Although List (cited in Ebeling, 1994) considers that once the protected industry is strong enough, the protection should be removed immediately, it may be true that several industries might be protected permanently in order to keep their monopolistic status in the domestic markets.

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Similar to the early infant industry argument, strategic trade theory has emerged recently, which supports protecting and supporting certain industries, which are expected to get a net gain in the long-run, and enables them to exploit a comparative advantage in order to compete with large monopolistic companies overseas efficiently (Slomm and Stotcliffe, 2004: 516).  It seems to be beneficial either for maximising national income or preventing from establishing a foreign-based monopoly (Lipsey and Chrystal, 2004: 616).  European Airbus Consortium, whose share of global production of commercial aircraft has risen to 57 percent, can be seen as an application of strategic ...

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