Free trade takes place when there are no barriers and no intrusions to trade put by the authority(government and trade organisations). Free trade allows goods and services to flow freely freely from one country to another. The opposite to free trade is Protectionism. There are many protectionism that the government of a particular country can impose on trade. Main types of protectionism:
The governement of Pakistan has imposed a trade barrier on the import of Tea from India. India tea is under a 10 percent import duty. Some possible reasons for the imposition of Import duty on Tea are given below.
* To prevent over specialisation
* To raise government revenue
* To remove balance of payment deficits
Given below is a graph that shows the effect of imposing import duty on the import of Tea.
Due to the imposition of import duty the prices for Tea rises from ‘P-world’ to ‘P- import duty’ because of which the Supply curve shifts from ‘S-world’ to ‘S- world+ import duty’ . Therefore there is an overall consumer loss. Areas ‘a’,’b’,’c’ and ‘d’ shows the consumer loss. Area ‘a’ shows the producers gain. Area ‘b’ shows green loss.
It is said to be a ‘Green Loss’ because there is inefficiency that is creeping in this area as inefficient domestic producers are now producing this area at a higher price. Area ‘c’ shows the government revenue due the import duty. Area ‘d’ shows the net loss. ‘d’ is not being produced or demanded due to the rise in prices, this shows the net loss towards the consumer.
Tea is an ‘important drink in every Pakistani house’ and Pakistan is the second largest importer of Tea. Therefore the demand curve for Tea in Pakistan is very inelastic. The smuggled tea is sold at a low cost but due to the Inelastic demand for Tea, The change in the price of tea should have a realively low change in the demand. However, the article states that Pakistan imports 140 million kg and 20 million kg is smuggled. This shows that 12.5 % of tea is smuggled, which is a very high rate. This indirectly shows that Tea inspite of being very inelastic in demand, a change in price will have a big effect on the demand.
Area ‘d’ in the above graph is consumer loss in Trade between India and Pakistan. However, this area is being demanded and supplied throught smuggling and illegal trade. Therefore, Area ‘d’ can also be observed as the government loss of revenue.
India and Kenya are the two main countrys supplying Pakistan with tea. Due to the drought in Kenya the prices have increased tremendously. This puts Pakistan in a very infavourable situation.
‘S-world’ takes into account the imported supply of Tea from India and Kenya. Due to the import duty the price shifts from ‘P world’ to ‘P- import duty’ and the supply shifts from ‘S- world’ to ‘S- world+ import duty’. Again due to the drougth the price shifts from ‘P- import duty’ to ‘P1’ and the supply shifts from ‘S- world+ import duty’ to ‘S- world 2’. Due to the very high prices people will stop consuming Tea and move to other alternatives like coffee. Also smuggling of Tea will increase tremendously. The net effect will have a tremedous loss of revenue for the government.