Countries occupying a different position in the world economy in general and in various commodity markets in particular, pursue a certain foreign trade policy to protect their interests.
Foreign trade policy is a purposeful influence of the state on trade relations with other countries.
The choice of national foreign economic policy is significantly influenced by both the general economic situation in the country and trends in the world economy, given the modern rapid internationalization of world economic relations, the expansion of world trade in goods and services, the development of international entrepreneurship, the growth in the number and increase in the scope of activities of TNCs.
Modern foreign trade policy is the interaction of two trends: protectionism and free trade (free trade).
Protectionism is the state policy of protecting the domestic market from foreign competition through the use of tariff and non-tariff instruments of trade policy.
Several forms of protectionism can be distinguished:
selective protectionism is directed against individual countries or individual products; industry protectionism protects certain industries; collective protectionism is carried out by separate groupings in relation to countries that are not members of them; hidden protectionism is carried out by the methods of domestic economic policy.
Despite the fact that both tariff and non-tariff methods of state influence on foreign trade usually lead to welfare losses, they are widely used by many countries. Both supporters and opponents of protectionism use a number of additional arguments (regarding their positions) that deserve attention.
Supporters of protectionism believe that the restriction of imports is necessary to support domestic producers, to preserve jobs, which should ensure social stability. Reducing imports will also boost domestic demand in the country, stimulating production and employment growth. However, protectionism creates conditions for the preservation of inefficient production, as it limits competition. Although imports reduce employment in import-substituting industries, they create new employment, which can be associated with the purchase, sale and service of imported products. The state can provide support to producers in a more efficient way, i.e. with less loss of wealth. Thus, while maintaining freedom of foreign trade, subsidies to producers will lead to the expansion of domestic production without raising prices, so consumers will not incur losses. At the same time, the total losses of the state from the provision of subsidies will be less than from the introduction of the tariff.
It is commonly said that protectionism is necessary to protect young industries. They need time to finally form and strengthen their position in the market. As they develop, the level of protectionism will decrease. However, it is quite difficult to identify really promising industries from the point of view of the formation of new comparative advantages of the country. In addition, protectionism reduces incentives to improve efficiency, as a result, the formation of the industry can last a very long time.
Protectionist policies are often carried out to replenish state budget revenues. This argument is popular in countries where a high-quality tax system has not yet been formed. It is easier to collect customs duty than to collect taxes, but budget revenues in this case will depend on the price elasticity of import demand. However, the more elastic the demand, the more state revenues will increase with the weakening of protectionism.
There is another argument in favor of protectionism in relation to industries that produce products that are strategically important for the country. An over-reliance on imports can indeed leave it vulnerable in emergency situations. However, there are some problems, for example, in the definition of these industries, since they can include most of the available at all. As for non-renewable resources, protectionism in this case can make the country dependent on imports in the future. As can be seen, the arguments in favor of protectionism are controversial and require careful verification, and, often, better means can be found to achieve the goal.
In addition to wealth losses, protectionism can have other negative consequences. Almost always, the protectionist policy pursued by one country will provoke a response from others. So, if a country reduces imports through tariff or non-tariff restrictions, then, most likely, its exports will decrease, which will lead to a decrease in employment, a decrease in aggregate demand, etc. Economic contradictions between countries can become very aggravated, which will have negative consequences for both sides. A protectionist foreign trade policy will raise the exchange rate of the national currency (as imports are reduced and the country’s net exports rise). An increase in the exchange rate will stimulate imports and will restrain exports.
In contrast to protectionism, the policy of free trade (free trade) is aimed at opening the domestic market to foreign goods, capital, labor, thereby increasing competition in the domestic market. Free trade is a policy of minimal state intervention in foreign trade, which develops on the basis of free market forces of supply and demand. State regulation in this case is carried out by methods of mainly tariff regulation and measures that encourage the inflow of goods and capital into the country.
Free trade promotes competition in domestic markets, forces enterprises to innovate by providing a wider choice of goods for consumers, and enables firms to take full advantage of comparative advantages and achieve economies of scale. Moreover, free trade unleashes dynamic forces seeking a lasting upturn in economic growth by encouraging improvements and innovations, while protectionism has increasingly impeded the action of these forces over time.
Free trade policies benefit any country, though not everyone to the same extent and not all groups of the population. In the importing country, the gain arises from the fact that the benefits to consumers exceed the losses of producers, and in the exporting country, the overall increase in welfare is due to the gains of producers, while consumers suffer losses.
In the case of open trade, there may be a decline in employment in the short term due to a decrease in incentives to develop both import-substituting industries and, possibly, industries that are not directly involved in foreign trade, but which will be affected by the liberalization process. And even a sharp increase in employment in the export sector will not be able to immediately compensate for its fall in other sectors. Enterprises in the export sector may not be able to absorb the labour force being released from other sectors, for example, because of the delay in making new investments or slow professional reorientation and limited labour mobility.