CHAPTER OUTLINES: Introduction. The Gains from Free Trade—the gains from inter-industry specialisation, the gains from intra-industry specialisation, adjustment costs. Tariff Protectionism. Non-Tariff Protectionism—import quotas, voluntary export restraints, anti-dumping and countervailing duties, subsidies, other types of non-tariff protectionism. Arguments for Protection. Strategic Trade Policy and the New Trade Theory—criticisms of strategic trade policy. The Political Economy of Protection. Conclusion.
In Chapter 1, we saw that one of the reasons for the growth of world trade over the past half century has been the reduction in the level of trade barriers. This made it possible for world trade to grow at a faster rate than world output. This, in turn, has resulted in an increase in the degree of interdependence existing between countries. Although increased economic interdependence makes it more difficult for countries to pursue an independent economic policy, it does make countries more prosperous. This is because countries tend to specialise more either in particular industries in which they enjoy a cost advantage or in particular products within those industries. The former constitutes inter-industry specialisation and the latter intra-industry specialisation. Both forms of specialisation bring welfare gains to countries. However, the nature of the gain differs according to the type of specialisation that results. In this chapter, some of the benefits which accrue to countries from freer trade and increased specialisation are examined.
However, governments are rarely prepared to allow complete free trade. Most countries give some protection to domestic producers by imposing tariffs or other forms of non-tariff restriction. In this chapter, the effects of different types of import protection are examined. The chapter concludes by discussing whether or not there exist any sound economic arguments for government intervention in trade whether in the form of restrictions on imports or measures to boost exports. It is argued that, although there exist a few good reasons for governments intervening in trade, global economic welfare will be maximised if governments pursue a policy of free trade. The chapter begins with an outline of the case for free trade, distinguishing between inter- and intra-industry