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32. Protectionism and free trade

Lead-in:

Why do you think it is necessary to impose tariffs or quotas on foreign goods and services?

Key words and phrases

  1. comparative cost principle – принцип порівнювальних витрат

  2. to raise living standards – підвищувати рівень життя

  3. absolute advantage – абсолютна перевага

  4. 4.division of labour – розподіл праці

  5. economies of scale – економія витрат, ефект масштабу

  6. software – програмне забезпечення

  7. to impose tariffs and quotas – обкладати тарифами та квотами

  8. home-produced substitutes – вітчизняні замінники

  9. dumping – демпінг

  10. cost price – собівартість

  11. to destroy or weaken competitors – знищувати або ослабляти конкурентів

  12. elastic prices – еластичні ціни

  13. creation of customs difficulties and delays – створювання митних перешкод та затримок

The majority of economists believe in the comparative cost principle, which proposes that all nations will raise their living standards and real income if they specialize in the production of those goods and services in which they have the highest productivity. Nations may have an absolute advantage in producing goods or services because of factors of production (raw materials), climate, division of labour, economies of scale.

This theory explains why there is international trade between North and South, e.g. coffee is going from Brazil to the USA, and semiconductors – in the opposite direction. But it does not explain the fact that 75% of the export of the advanced industrial countries goes to other similar advanced countries, with similar resources, levels of technology, education and capital. It is more a historical accident than a result of natural resources that the US leads in building aircraft, semiconductors, computers and software, while Germany makes luxury automobiles, machine tools and cameras.

However the economists who recommend free trade do not face elections every four or five years. Democratic governments do, and that encourages them to impose tariffs and quotas in order to protect their strategic industries. Other reasons for imposing tariffs include the following:

With tariffs, it is impossible to know the quantity to be imported, because prices may be elastic. With quotas, governments can set a limit to imports. Other non-tariff barriers that some industries use include so-called safety norms and creation of customs difficulties and delays.