International Economics Part 3.1 - Free trade and protectionism

Free Trade - Free trade is a policy followed by some international markets in which countries' governments do not restrict imports from, or exports to, other countries. (i.e. no trade barriers)

Protectionism -  Protection is the attempt to limit imports or promote exports by putting up barriers to trade. Despite the arguments in favor of free trade and increasing trade openness, protectionism is still widely practiced. Here are a few reasons why:

1. Protecting Infant Industry
2. Protecting domestic workforce
3. Anti-dumping measure
4. To increase government revenue and improve current account deficit

1) Protecting Infant industry: Barriers to trade are used to protect sunrise industries, also known as infant industries, such as those involving new technologies. This gives new firms the chance to develop, grow, and become globally competitive. Protection of domestic industries may allow they to develop a comparative advantage. For example, domestic firms may expand when protected from competition and benefit from economies of scale. As firms grow they may invest in real and human capital and develop new capabilities and skills. Once these skills and capabilities are developed there is less need for trade protection, and barriers may be eventually removed.

2) Protecting an industry may, in the short run, protect jobs, though in the long run it is unlikely that jobs can be protected indefinitely. If the unemployment occurs at large industries, it could lead to very high unemployment rates. However, since the protected industries will be in decline in the long run, protectionism will just prolong this process.