Free trade refers to the economic policy of removing barriers to trade among countries,

enabling the unrestricted import and export of goods and services. It’s grounded in the
theory of comparative advantage, which posits that countries should specialize in
producing goods and services they can make most efficiently and trade for those they
can’t.

Advantages of Free Trade

It stimulates economic growth: Even when limited restrictions like tariffs are applied, all
countries involved tend to realize greater economic growth.

It helps consumers: Trade restrictions like tariffs and quotas are implemented to protect
local businesses and industries. When trade restrictions are removed, consumers tend to
see lower prices because more products imported from countries with lower labor costs
become available at the local level.

It increases foreign investment: When not faced with trade restrictions, foreign investors
tend to pour money into local businesses helping them expand and compete.

It reduces government spending: Governments often subsidize local industries, like

agriculture, for their loss of income due to export quotas. Once the quotas are lifted, the
government’s tax revenues can be used for other purposes.

It encourages technology transfer: In addition to human expertise, domestic businesses

gain access to the latest technologies developed by their multinational partners.

Disadvantages of Free Trade

It causes job loss through outsourcing: Tariffs tend to prevent job outsourcing by keeping
product pricing at competitive levels. Free of tariffs, products imported from foreign
countries with lower wages cost less. While this may be seemingly good for consumers, it
makes it hard for local companies to compete, forcing them to reduce their workforce.

It encourages theft of intellectual property: Many foreign governments, especially those in

developing countries, often fail to take intellectual property rights seriously. Without the
protection of patent laws, companies often have their innovations and new technologies
stolen, forcing them to compete with lower-priced domestically-made fake products.

It allows for poor working conditions: Similarly, governments in developing countries rarely
have laws to regulate and ensure safe and fair working conditions. Because free trade is
partially dependent on a lack of government restrictions, women and children are often
forced to work in factories doing heavy labor under grueling working conditions.
It can harm the environment: Emerging countries have few, if any environmental protection
laws. Since many free trade opportunities involve the exporting of natural resources like
lumber or iron ore, clear-cutting of forests and un-reclaimed strip mining often decimate
local environments.

It reduces revenues: Due to the high level of competition spurred by unrestricted free trade,
the businesses involved ultimately suffer reduced revenues. Smaller businesses in smaller
countries are the most vulnerable to this effect.

Protectionism is the practice of following protectionist trade policies. A protectionist trade

policy allows the government of a country to promote domestic producers, and thereby
boost the domestic production of goods and services by imposing tariffs or otherwise
limiting foreign goods and services in the marketplace.

Protectionist policies also allow the government to protect developing domestic industries
from established foreign competitors.

Types of Protectionism

Protectionist policies come in different forms, including:

1. Tariffs

The taxes or duties imposed on imports are known as tariffs. Tariffs increase the price of
imported goods in the domestic market, which, consequently, reduces the demand for
them.

2. Quotas

Quotas are restrictions on the volume of imports for a particular good or service over a
period of time. Quotas are known as a “non-tariff trade barrier.” A constraint on the supply
causes an increase in the prices of imported goods, reducing the demand in the domestic
market.

3. Subsidies

Subsidies are negative taxes or tax credits that are given to domestic producers by the
government. They create a discrepancy between the price faced by consumers and the
price faced by producers.

4. Standardization

The government of a country may require all foreign products to adhere to certain
guidelines. For instance, the UK Government may demand that all imported shoes include
a certain proportion of leather. Standardization measures tend to reduce foreign products
in the market.

Reasons for Protectionism

An economy usually adopts protectionist policies to encourage domestic investment in a

specific industry. For instance, tariffs on the foreign import of shoes would encourage
domestic producers to invest more resources in shoe production.

Although domestic producers are better off, domestic consumers are worse off as a result
of protectionist policies, as they may have to pay higher prices for somewhat inferior goods
or services. Protectionist policies, therefore, tend to be very popular with businesses and
very unpopular with consumers.

Advantages of Protectionism

• More growth opportunities: Protectionism provides local industries with growth

opportunities until they can compete against more experienced firms in the international
market

• Lower imports: Protectionist policies help reduce import levels and allow the country to
increase its trade balance.

• More jobs: Higher employment rates result when domestic firms boost their workforce

• Higher GDP: Protectionist policies tend to boost the economy’s GDP due to a rise in
domestic production

Disadvantages of Protectionism

• Stagnation of technological advancements: As domestic producers don’t need to worry

about foreign competition, they have no incentive to innovate or spend resources
on research and development (R&D) of new products.

• Limited choices for consumers: Consumers have access to fewer goods in the market as
a result of limitations on foreign goods.

• Increase in prices (due to lack of competition): Consumers will need to pay more without
seeing any significant improvement in the product.
• Economic isolation: It often leads to political and cultural isolation, which, in turn, leads
to even more economic isolation.

Impact of Taxation:

Impact of taxation is the immediate burden of tax on the tax payer. Its initial stage

Of tax burden on the person who is liable to pay. The impact of tax is the first point

Of contact. The impact of tax is on the person on whom it is imposed

First. The term impact is used to represent the immediate result of or original imposition of
the tax.

Incidence of Taxation: Incidence of tax is the final resting point at which the

Ultimate burden of tax gets settled. It is economic term to find the ultimate source

On whom finally tax get settled.

Example: Person A is producer of commodity X let assume that due to new

Government policy he has to bear additional cost of GST for his product. Then the

Impact of tax is on person A, but he may forward the tax burden by raising the price

Of his product exactly equals to the amount of GST which he has to

Pay it to the government. Hence it become very clear that the incidence of tax is

On Buyer of commodity X. thus incidence of tax in the final resting point who finally

Pay the tax.

According to Dalton: incidence of taxation is classified further in two form –

(i) Real Burden: The sacrifice incurred in payment of tax is the real burden on

Tax payer.

(ii) Money Burden: The money burden or the amount which is imposed on the

Tax payer.

The other classification of incidence of taxation by Mrs. Ur usula Hicks are

(i) Formal Incidence – The tax authority collect tax revenue, the direct money

Burden of such tax is formal incidence of taxation.

(ii) Effective Incidence – Due to imposition of taxation the entire economy

Activity get affected. Thus overall economic effect of tax is called as effective

Incidence.

Distinguish between Impact and Incidence of Taxation

1. Impact refers to initial burden of tax Incidence refers to ultimate burden of

Tax

2. Impact is at the point of imposition Incidence occurs at the point of

Settlement.

3. The impact of a tax falls upon the

Person from whom the tax is

Collected

The incidence rests on the person who

Pays it eventually.

4. Impact may be shifted Incidence cannot

4. Example – Direct Tax i.e Income

Tax in which impact and incidence

Is on same person

Example – Indirect Tax i.e GST in

Which impact and incidence are not on.

Shifting of taxation:

Shifting of taxation relates to transferring the money burden of tax on someone else.

The objective behind shifting of taxation is to escape self from payment of taxation.

Tax shifting is the intermediate process of between the impact and incidence of

Taxation. Commodity taxation is the source where shifting of taxation is possible.

The price is the medium through which the shifting of taxation can be done. Due to

Shifting of taxation the price of the product increases the buyer has born the burden

Of shifting of tax, or the other possibility is that if the price remains same the quality

Of quantity get affected. There are different types of shifting of taxation.

1. Forward Shifting: This is most common tendency of shifting of taxation.

Here the burden of tax is forwarded further. Example – Tax levied by the

Government leads to addition in the cost of production to the producer. Then

Producer shift the money burden of tax on to the buyer by raising the price of

Its product.

2. Backward Shifting: backward shifting is the process where the impact and

Incidence of tax is not on the buyer i.e the price do not get change. Perhaps

The producer shift the money burden of tax backward by reducing the wages

Of workers on by bargain to reduce the cost of raw material to the seller of

Raw material.

3. Combination Shifting: By name itself we can understand that here

Combination of both forward and backward shifting takes place. Producer

Tries to shift forward partial burden of tax on buyer by raising price partially

And partially shift backward on factors of production like workers by reducing

Wages or deteriorating the quality of input.

4. Single point and Multi –Point Shifting –

Single point shifting of taxation is at single source i.e when the burden of tax

Is shifted from producer to the consumer it is called as single point shifting.

Multi point shifting – It is the shifting of tax burden at various level. First

Level is government when they impose tax on producer, for example excise

Duty on production of commodity. Producer forward the addition cost of such

Tax burden to the retailer and finally retailer forward it to the buyer who is the Ultimate tax
payer