Government Intervention In International Trade

Countries around the globe trade with each other. Foreign trade is beneficial to nations since it allows them to produce goods and dispose of some of them abroad in exchange for those foreign products demanded domestically.

The dominant feature of international trade theory is the assumed superiority of free trade and non intervention. This paper tries to argue that government intervention in international trade may not always be harmful. It may prove to be ieal in most cases, depending upon the situation in hand.

Free trade is a system of trade policy that allows imports and exports to be conducted without government intervention. Eighteenth century neo classical theorists Adam smith, david ricardo, eli hecksher and bertin ohlin emphasised

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The standard case for free trade is based on a number of assumptions and simplifications. Much of the literature ignores the macroeconomic context.

For eg. Kaldor argues that the ricardian rationale for free trade is dependent on the assumptions of constant returns to scale. However, the existence of economies of scale in manufacturing means that a nation that is successfully competing in foreign trade can expect that the advantage of an expanding market will increase it competitiveness.

In analysing british post war economic policies, kaldor (1971) argues that the poor economic performance was due to insufficient demand. The importance of the idea of export led growth gave rise to a policy debate on the best means for securing full employment. However, any attempts to generate a substantial and long term improvement in competitiveness through the exchange rate may require a large reduction in the nominal rate with repercussions for inflation, real income and economic stability. This led kaldor and others to argue for some form of protection of competitive manufactures. By encouraging import substitutes, protection can expand the domestic traded goods

Infant industry argument

It is the argument for temporary protection of industries during the early years of their development to enable them to gain experience. Virtually, all now developed countries especially Britain and united states, actively used interventionist industrial, trade and technology policies that are aimed at promoting infant industries during their catchup periods.

For eg:-britain entered its post feudal age as a relatively backward economy . Until 1600, it relied on exports of raw wool and of low value added wool clothto the more advanced low countries of bruges, ghent and ypres. The monarchs taxed these products namely for revenue reasons, but since cloth was taxed more lightly than raw wool, this encouraged import substitution in wool cloth and a certain amount of export success. Further impetus for the development of this industry came as a deliberate infant industry promotion policy of the tudor monarchs. The monarchs, especially Henry 7 and Elizabeth 1, transformed England from a country heavily relying on raw wools exports into the most formidable woollen manufacturing nation in the