Essay on Free Trade: Arguments for and against!
Free trade means free and unrestricted movement of goods between countries. Free trade refers to a condition of international trade when all kinds of artificial controls on international trade, such as tariffs, quotas, etc. are absent. Under free trade, the distinction between domestic trade and international trade disappears. Free trade policy is also known as the laissez- faire policy, i.e., the policy of government non-interference in foreign trade. Under such a policy, all barriers to the international movement of goods are removed and the trade between the countries is allowed to take its natural course.
According to Adam Smith, free trade is “that system of commercial policy which draws no distinction between domestic and foreign commodities and, therefore, neither imposes additional burdens on the latter, nor grants any special favours to the former.” Penguin Dictionary defines free trade as “the condition in which the free flow of goods and services in international exchange is neither restricted nor encouraged by direct government intervention.”
According to Jagdish Bagwati, “Free trade policy involves complete absence of tariffs, quotas, exchange restrictions, taxes and subsidies on production, factor use and consumption.”
Arguments in Favour of Free Trade:
The classical economists, like Adam Smith, Ricardo, etc., advocated the free trade policy as against the mercantilist system of protection.
Various arguments can be given in favour of the free trade policy:
1. Trade According to Comparative Advantage Theory:
Under free trade, production and exchange take place in accordance with the theory of comparative advantage.
The theory of comparative advantage has the following implications:
(i) Each trading country will tend to increase the output of that good in which it has comparative advantage and will tend to reduce the output of that good in which it has a comparative disadvantage.
(ii) Each country will export the good in which it has comparative advantage and import the other.
(iii) World output will increase and will become more efficient,
(iv) Each country will gain from free trade relative to autarky.
(v) The gains enjoyed by a country will be greater the more favourable its terms of trade i.e., the greater the difference between relative prices before and after trade.
2. Optimum Allocation of Resources:
Free trade results in the optimum allocation of resources. It permits the reallocation of world resources in accordance with the principle of comparative advantage. Under free trade, every country specialises only in the production of those goods in which it has comparative advantage.
This leads to proper and most efficient use of productive resources of the world. The resources are not wasted in producing those goods in which a country has comparative disadvantage and which it can import cheaply from other countries.
3. Maximisation of Output:
The theory of international trade has shown that the world output of goods and services can be maximised only under the conditions of free trade and international specialisation. International specialisation in accordance with the theory of comparative advantage leads to larger production and at lower costs in all the countries.
In the words of Ingo Walter, “The world as a whole is certainly materially better off under free trade than with no trade at all and so is the individual nation,
4. Optimisation of Consumption:
Free trade helps the trading countries to secure the optimisation of consumption. In the absence of international trade, a country’s domestic consumption is limited to its production possibilities. But, through international trade, the consumption possibilities of the country can expand beyond its production possibilities.
Figure 1 illustrates the consumption optimisation gain from free trade. PP is the production possibility curve of a country. It is concave to the origin indicating the increasing cost conditions; in order to produce more of one good, increasing amounts of other good are to be given up. In the absence of trade, all the points on PP curve show the country’s possible production and consumption alternatives.
Suppose, in the absence of international trade, the country is at point A and producing and consuming OW of wheat and OC of cloth. The domestic price ratio is given by the slope of TT. If the country has the opportunity to trade at the international price ratio as indicated by the slope of T’T’ and if it adjusts its domestic production at point B, thus producing OW1 of wheat and OC1 of cloth, consumption at all points on T’T’ line is possible.
If the country continues to consume OW of wheat, it will be able to export WW1 (or LB) of wheat in exchange for KL of cloth. Thus, the country reaches the consumption point K which lies outside its own consumption and production possibilities as indicated by PP curve; it is able to consume more of cloth without consuming any less of wheat.
The country’s consumption gain (measured in terms of cloth) is KA (or C2C). Of course, the country can still improve its consumption level and can consume more of cloth and more of wheat by attaining any point between K and K’ on T’T’ line.
5. Other Benefits to Consumers:
Free trade also benefits the consumers- (a) by enabling them to enjoy the large variety of foreign goods which their own country cannot produce; and (b) by providing them the imported goods at cheaper rates.
6. Wide Market:
Free international trade widens the size of the market which, in turn, results in greater specialisation and division of labour. All this leads to minimisation of costs and optimisation of world’s material welfare.
7. Equalisation of Prices:
Free trade tends to equalise both commodity as well as factor prices in all the regions. However, perfect equalisation of prices is not possible because of imperfect factor mobility, transport costs, etc.
8. Larger Factor Incomes:
Under free trade, the incomes of various factors of production will also increase because they will now be employed more efficiently in proper uses. Thus, wages, interest, rent are higher under free trade than otherwise.
9. Check on Monopolies:
Free trade promotes competition and prevents monopolistic tendencies. The fear of foreign competition does not permit the producers at home to form monopolies and exploit the consumers by raising the prices of their products.
10. Efficient Entrepreneurs:
Free trade and the resultant competition from abroad encourage as well as compel the domestic producers to keep up their efficiency. It forces them to improve their methods of production in order to reduce the production costs and make their business more efficient.
11. Economic Development:
Free trade also promotes economic development. It benefits the less developed countries by- (a) encouraging specialisation and division of labour; (b) widening the size of the market; (c) stimulating healthy competition which improves productive efficiency; (d) increasing skills, technical know-how and managerial efficiency; (e) making available necessary raw materials, machinery and foreign capital; etc.
In the words of Haberler, “International trade had made a tremendous contribution to the development of less developed countries in the nineteenth and twentieth centuries and can be expected to make in the future if it is allowed to proceed freely.
12. International Co-Operation:
Free trade promotes cooperation and mutual understanding among the nations. This helps in creating an atmosphere of peace and good-will in world.
Arguments against Free Trade:
Despite many advantages, free trade policy has never been completely adopted by all the countries of the world. Particularly after the World War II, the policy was abandoned even by those who had previously adopted it.
The following arguments are given against free trade policy:
1. Unrealistic Policy:
Free trade policy is based on the assumption of laissez-faire or government nonintervention. Its success also requires the pre-condition of perfect competition. But, such conditions are unrealistic and do not exist in the actual world.
2. Non-Cooperation of Countries:
Free trade policy works smoothly if all the countries cooperate with each other and follow this policy. If some countries decide to gain more by imposing import restrictions, the system of free trade cannot work.
3. Economic Dependence:
Free trade increases the economic dependence on other countries for certain essential products such as food, raw materials, etc. Such dependence proves harmful particularly during war time.
4. Political Slavery:
Free trade leads to economic dependence and economic dependence leads to political slavery. For political freedom, economic independence is necessary. This requires abandonment of free trade.
5. Unbalanced Development:
Free trade and the resultant international specialisation leads to unbalanced development of national economy. Under this system, only those sectors are developed in which the country has a comparative advantage. Other sectors remain undeveloped. This results in lop-sided development.
Free trade may lead to cut-throat competition and dumping. Under dumping, goods are sold at very cheap rates and even below their cost of production in order to capture the foreign markets.
7. Harmful Products:
Under free trade, injurious and harmful products may be produced and traded. Trade restrictions are necessary to check the import of such products.
8. International Monopolies:
Free trade may lead to international monopolies. It encourages the establishment of multinational corporations. These corporations tend to acquire monopoly position and thus harm the interest of the local people.
9. Reduction in Welfare of Certain Groups:
While free trade tends to maximize world production of goods and services, it may simultaneously hurt the welfare of certain group in every country. Under free trade, the output of those commodities in which the country has comparative advantage tend to increase to meet the export demand, and the output of goods in which the country has comparative disadvantage contracts due to pressure from import competition. Thus, the real income of the groups engaged in the export industries will rise and real income of those engaged in the import competing industries will fall.
10. Harmful to Less Developed Countries:
Free trade is harmful for the less developed countries for the following reasons:
(i) Competition under free trade is unfair and unhealthy. The less developed countries find it difficult to compete with the economically advanced countries.
(ii) Under free trade, gains of trade are unequally distributed depending upon the level of development of different countries. The terms of trade are favourable for the developed countries, and unfavourable for the poor countries.
(iii) Less developed countries generally experience unfavourable balance of payments. The problem of unfavourable balance of payments cannot be solved under free trade policy.
(iv) Free trade policy adopted by the British government in India led to the destruction of Indian cottage and small scale industries.
(v) The less developed countries cannot protect their infant industries under the policy of free trade.
(vi) Free trade may endanger economic and political independence of the backward nations.