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Exercise 1 Answers

Given the potential advantages of free trade many countries including Australia protect their domestic industries from international competition by imposing artificial barriers on imported goods and services.

A popular argument is for the protection of sunrise or infant industries until they become internationally competitive. However it is a very difficult task to target the right industries and some may require protection for a number of years.

The protection of employment in the domestic economy is another argument used by governments in times of recession and high unemployment. Some countries have large labour forces that are paid low wages and can export goods at very competitive prices. Inefficient industries in importing countries may be forced to close creating unemployment . This argument fails to take into consideration the law of comparative advantage .

Dumping often occurs when producers have had their production costs subsidised . This allows goods and services to be sold on the world market at prices well below cost.

For example, wheat farmers in the USA and EU benefit from non-tariff (NTBs) barriers such as subsidies; depressing world commodity prices and reducing incomes to Australian farmers.

Governments may also put forward a politically motivated case for protection based on self-sufficiency . According to this argument the production of goods such as military equipment is of strategic importance and should be domestically produced rather than imported.

Restricting free trade distorts the allocation of resouces from the more efficient to less efficient industries. Employment levels will be maintained in the protected industries at the expense of the more Efficient areas of the economy.

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