Free Trade and Protection
Arguments for and Against Trade Liberation
Arguments for Trade Liberation
Arguments for trade liberation are under the abbreviation CIVIC-J.
Trade Allows CONSUMPTION to be greater than production.
The law of comparative advantage states that when countries compete in trade, all participants will be able to consume more resources. By specialisation, nations can expand their consumption possibilities.
Importing Goods and Services Lowers INFLATION
Countries only import when the world price is lower than the domestic price. By importing, households have access to lower priced goods and services with no or minor changes in quality.
Importing Goods or Services Increases the VARIETY of Goods and Services Accessible by Households
There are limitations to what goods and services countries can produce. Through trade, households can access goods and services that cannot be produced in Australia or is too costly to produce.
Trade Increases real INCOME and living standards
The fast period of world economic growth was during periods of high world trade growth. Australia's GDP rose substantially due to radically trade reforms equating to increases in real incomes. In addition, trade allows for a higher consumption of resources, increasing living standards.
Trade Increases COMPETITION and Resource Efficiency
Trade forces domestic producers to be more efficient or change production. Trade forces inefficient resources to join expanding sectors of the economy. Although this creates structural change and unemployment in the short term, this is outweighed by gains in long-term output and employment.
Trade Creates More Higher Paying JOB Opportunities
Trade creates more new and higher paying jobs. Trade has forced the structural change in Australia's economy from a manufacturing country to a resources and services based economy. Jobs in resources and services industries provide higher incomes in contrast to manufacturing.
Arguments Against Trade Liberation
Arguments against trade liberation can be remembered by the abbreviation BADFINE.
BALANCE of Payments Argument - Need for a Trade Surplus
Some critics argue for protectionism measures to ensure a trade surplus - meaning that our exports should be higher than our imports. However, this is wrong as it means that producers are more important than consumers.
Dumping is where countries export goods and services on the world market at below cost, often to discourage competition from domestic producers. Some critics argue the need for protectionism measures to protect domestic industries from harmful anti-dumping behaviour from other countries. The only problem is that is it is hard to distinguish between dumping and efficiency improvements.
According to the principle of comparative advantage, a country should specialise in the production of a few goods and services. The diversification argument states that some industries should be protected to diversify the economy and reduce vulnerability to market shocks.
FOREIGN Investment Argument
The foreign investment argument states that protected industries carry reduce risk and can attract foreign investment. Foreign investment can then be used to finance scalability and ensure a competitive economy of scale.
The infant industry argument states that smaller industries need to be protected to allow time for growth into economies of scale where they can be internationally competitive. The only problem is that the industries could become too dependent on protectionism and be discouraged from innovating. In addition, while it is easy to set up protectionist measures, it is politically unfavourable to dismantle them.
NATIONAL Security Argument
The defence argument states that certain industries should be protected, despite inefficiency, due to their importance during times of war. Industries such as certain agriculture and manufacturing industries play a crucial role in the security of a country. However, this argument is invalid during times of peace.
One of the main arguments against trade liberation is that protectionist measures should protect domestic industries as this will secure employment in those industries. However, this encourages employment in inefficient industries, whereas the labour would be better off retaining and joining a more productive industry and contributing to a higher, long-term economic growth
For example, many people were unfavourable about the government's decision to end the Automotive Transformation Scheme subsidy as this was one of the factors that led to the closure of automotive manufacturing in Australia and the large losses in employment in that industry.