Free trade and protectionism

Free trade is the exchange of goods and services across national borders without government restrictions.

Benefits of free trade

• Allows an economy to consume outside its production possibility curve
• Puts pressure on firms to keep their prices and costs down and raise the quality of their products
• Decreases the power of domestic monopolies
• Greater advantage of economies of scale
• Greater variety of products
• Wider source of raw materials and capital goods

Protectionism represents any attempt to impose restrictions on goods and services. The aim is to protect domestic industries from overseas competition and prevent the outcome from the interplay of free market forces of supply and demand.

Types of trade protection

• Tariff
• Quota
• Subsidies
• Voluntary export restraints(VERs)
• Excessive administrative burdens( "red tape")

• To protect infant industries
• To protect declining industries
• To protect strategic industries
• To prevent dumping
• To improve balance of payments