Free trade and protection | International Economics Notes & MCQs

Free trade and protectionism represent two opposing approaches to international trade policy, each with distinct economic implications. Here's a detailed analysis:

Free Trade

Definition: A policy allowing goods/services to move across borders with minimal restrictions (tariffs, quotas, or subsidies) 1.

Key Mechanisms:

• Comparative Advantage: Countries specialize in producing goods where they have lower opportunity costs, increasing global output

${\text{ (Output}}_A+{\text{Output}}_B{)}_{\text{trade}}>{\text{(Output}}_A+{\text{Output}}_B{)}_{\text{no trade}}$ 15.

• Market Expansion: Enables firms to access larger consumer bases, fostering economies of scale.

Advantages:

1. Lower Consumer Prices: Competition reduces global prices (e.g., electronics from comparative advantage nations) 16.
2. Economic Growth: Countries like Singapore and South Korea achieved rapid development through export-oriented free trade 1.
3. Innovation Incentives: Exposure to global markets drives technological advancements 5.

Disadvantages:

1. Job Displacement: Industries like U.S. manufacturing lost 5 million jobs (1997–2018) due to outsourcing 16.
2. Strategic Vulnerabilities: Overreliance on imports (e.g., semiconductor shortages during COVID-19) 6.
3. Environmental Concerns: Firms may relocate to regions with lax regulations, increasing pollution 1.

Protectionism

Definition: Government interventions (tariffs, quotas, subsidies) to shield domestic industries from foreign competition 27.

Common Tools:

Policy	Effect	Example
Tariffs	Raise import prices (e.g., 25% U.S. steel tariffs)	U.S.-China trade war (2018–2020) 6
Quotas	Limit import quantities	EU restrictions on Chinese textiles
Subsidies	Lower production costs for domestic firms	U.S. agricultural subsidies

Advantages:

1. Infant Industry Protection: Allows emerging sectors (e.g., India’s renewable energy) to develop 35.
2. Job Retention: U.S. steel tariffs temporarily saved 16,000 jobs (2018) 6.
3. National Security: Ensures critical goods (e.g., pharmaceuticals) remain domestically produced 7.

Disadvantages:

1. Higher Consumer Costs: U.S. sugar tariffs triple domestic prices compared to global markets 4.
2. Retaliation Risks: China’s counter-tariffs cost U.S. agriculture $27 billion (2018) 6.
3. Economic Stagnation: Protected industries often become inefficient (e.g., India’s pre-1991 "License Raj" system) 5.

Theoretical Foundations

• Ricardian Model: Free trade maximizes global welfare through specialization 1.
• Heckscher-Ohlin Model: Countries export goods using abundant resources (e.g., Saudi oil exports) 5.
• Strategic Trade Theory: Temporary protection can help industries achieve global competitiveness (e.g., Japan’s auto industry in the 1970s) 3.

Modern Context

Free Trade Trends:

• WTO Agreements: Reduced average global tariffs from ~22% (1947) to <5% (2024) 6.
• Regional Pacts: USMCA increased North American trade by 15% (2020–2024) 5.

Protectionist Resurgence:

• Geopolitical Tensions: U.S. CHIPS Act (2022) restricts semiconductor exports to China.
• Pandemic Lessons: 68 countries imposed export bans on medical supplies (2020) 6.

Economic Impact Comparison

Metric	Free Trade Effect	Protectionism Effect
Consumer Prices	↓ 10–30% for traded goods 1	↑ 15–40% (e.g., EU agricultural tariffs) 4
GDP Growth	↑ 0.5–2% annually in open economies	↓ 0.3–1.2% due to inefficiencies 6
Employment	Net gain in export sectors	Short-term gains in protected industries

Case Study: The Smoot-Hawley Tariff (1930) reduced U.S. imports by 66%, worsening the Great Depression 6. Conversely, post-1991 India’s trade liberalization boosted GDP growth from 3% to 8% 5.

In conclusion, while free trade enhances long-term efficiency and growth, protectionism addresses short-term political and security concerns. Most economies adopt hybrid strategies, balancing openness with strategic safeguards 57.

MCQs on Free trade and protection

1. What is the main economic benefit of free trade based on comparative advantage?
   A) It fosters an efficient allocation of world resources
   B) It increases tariffs on imports
   C) It restricts competition
   D) It protects domestic industries from foreign competition
   Answer: A3

2. Which of the following is a common method of protection used by countries to shield domestic industries?
   A) Free trade agreements
   B) Tariffs and quotas
   C) Export subsidies
   D) Currency devaluation
   Answer: B5

3. A tariff is defined as:
   A) A tax imposed on exported goods
   B) A tax imposed on imported goods
   C) A limit on the quantity of exports
   D) A subsidy to domestic producers
   Answer: B58

4. Which of the following best explains why many economists support free international trade?
   A) Workers who lose jobs can collect unemployment benefits
   B) Long-run gains to consumers and some producers exceed losses to others
   C) It eliminates all unemployment
   D) It allows governments to protect all domestic industries indefinitely
   Answer: B3

5. What does a customs union involve?
   A) No restrictions on trade and factor movement
   B) Trade is free and no customs duties among members, plus a common external tariff
   C) Common currency among member countries
   D) Complete economic integration including fiscal policies
   Answer: B2

6. Which of the following is NOT a non-tariff method of protection?
   A) Quotas
   B) Import licenses
   C) Export subsidies
   D) Currency tariffs
   Answer: D8

7. When exports exceed imports, the country is said to have a:
   A) Trade deficit
   B) Balanced trade
   C) Trade surplus
   D) Protectionist policy
   Answer: C5

8. The TRIMS Agreement primarily aims to:
   A) Regulate foreign investment in services
   B) Prohibit quantitative restrictions on imports imposed by foreign investors
   C) Increase tariffs on imported goods
   D) Promote subsidies for domestic industries
   Answer: B5

9. Which of the following is a likely effect of imposing tariffs on imported goods?
   A) Lower prices for consumers
   B) Increased competition for domestic producers
   C) Higher prices for consumers and protection for domestic producers
   D) Increased imports
   Answer: C5

10. Free trade areas differ from customs unions in that:
    A) Free trade areas have a common external tariff, customs unions do not
    B) Customs unions have a common external tariff, free trade areas do not
    C) Free trade areas include free movement of labor and capital
    D) Customs unions do not remove tariffs among members
    Answer: B2

11. Which of the following is a benefit producers may gain from free trade?
    A) Reduced competition
    B) Access to larger markets and economies of scale
    C) Guaranteed government subsidies
    D) Protection from foreign competition
    Answer: B8

12. The terms of trade reflect:
    A) The rate at which gold exchanges internationally for any domestic currency
    B) The ratio at which nations exchange two goods
    C) The cost conditions in a single country’s production possibilities curve
    D) The division of gains from trade equally among countries
    Answer: B3

13. Which of the following statements about quotas is true?
    A) Quotas are taxes on imports
    B) Quotas limit the quantity of a good that can be imported
    C) Quotas increase the supply of imported goods
    D) Quotas are subsidies to domestic producers
    Answer: B5

14. An economic union is characterized by:
    A) No restrictions on trade and factor movement
    B) Trade free of customs duties among members
    C) Common currency and coordinated economic policies
    D) Only tariff reductions
    Answer: C2

15. Which of the following is NOT an argument commonly used for protectionism?
    A) Protecting infant industries
    B) National security concerns
    C) Increasing consumer choice
    D) Preventing dumping by foreign firms
    Answer: C7

16. If the world price of a good is lower than the domestic price, under free trade, the country will:
    A) Export the good
    B) Import the good
    C) Neither import nor export the good
    D) Increase domestic production
    Answer: B3

17. The effective rate of protection measures:
    A) The nominal tariff rate on the final product only
    B) The tariff rate adjusted for tariffs on imported inputs used in production
    C) The quota limits on imports
    D) The subsidy rate given to exporters
    Answer: B7

18. Which of the following best describes a free trade area?
    A) Member countries remove trade barriers among themselves but maintain independent external tariffs
    B) Member countries have a common external tariff on imports from non-members
    C) Member countries share a common currency
    D) Member countries have full economic integration including fiscal policy
    Answer: A2

19. Which of the following is a disadvantage of protectionism?
    A) Encourages domestic innovation
    B) Protects jobs in the short term
    C) Leads to inefficiencies and higher prices for consumers
    D) Promotes global economic integration
    Answer: C5

20. Which of the following is true about international trade?
    A) It involves trade only between regions within a country
    B) It involves trade between countries
    C) It excludes services
    D) It is unaffected by political factors
    Answer: B

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