Trade Restrictions in Forex

In recent years, trade restrictions have been proposed for stimulating industrialization in the primarily agrarian economies, to redress the imbalance caused by lopsided development in the past.

The need for protection was recognized long back by Alexander Hamilton, in his classic "Report on Manufactures", presented in 1791. Hamilton argued that, since the restrictive regulations abroad were making it difficult for the increasing surplus of the American produce to find an outlet in foreign markets, it was necessary to create extensive demand at home for this surplus, by developing manufacturers.

He refuted the contention that agriculture was more productive than manufacturing. He held that manufacturing gave more opportunities for division of labor and use of machinery, making possible a fuller utilization of the potential productivity of the labor of women and children, and offered scope for diversity of talents and dispositions He also claimed it attracted foreign labor and capital, provided for a more ample and varied field for enterprise, and created a stable demand for the products of domestic agriculture.

According to Hamilton, countries having both extensive agriculture and well-developed manufacturing would be economically more prosperous than those depending solely or primarily on agricultural activities.

In support of this contention he gave three principal arguments: the two types of industry provided a dependable domestic market for each other's products, and diminished the reliance of the nation's business upon undependable foreign markets; the two offered a greater variety of goods to foreign customers, and thus stimulated exports; the development of both agriculture, and manufacturing, decreased the dependence of the country on one (or a few) products, and thus the injury caused to the country, as a consequence of the failure of the market for a particular commodity.

Compensation agreements have developed generally out of a shortage of foreign exchange. These are barter arrangements. Goods are exchanged for goods without the intervention of foreign exchange. Compensation agreements may be between private parties with, or without, government control and supervision, or between government (or semi-government) agencies.

A private compensation agreement generally requires the collaboration of four parties. Suppose, for illustration, that Indian cloth is to be exchanged for Pakistani jute. To affect this transaction, four parties are required: An importer of jute in India, an exporter of jute in Pakistan, an importer of cloth in Pakistan, and an exporter of cloth in India.

The Indian importer will import jute of a value equivalent to that of cloth exported by the Indian exporter. The Indian importer of jute will make the payment to the Indian exporter of cloth in terms of domestic currency, instead of making it to the Pakistani exporter of jute in terms of Pakistani currency.

Similarly, the Pakistani importer will import cloth of a value equivalent to that of the jute exported by the Pakistani exporter. The Pakistani importer of cloth will make the payment to Pakistani exporter of jute, in terms of domestic currency, instead of making it to the Indian exporter of cloth, in terms of Indian currency.