Free Trade Policy: it’s Advantages with Disadvantages | Trade Policies
Policy of non-interference by government in foreign trade is referred to as “free trade”. Free trade policy implies absence of any artificial restriction on or obstacle to the freedom of trade of a country with other nations.
According to Adam Smith, the term “free trade” is used to denote “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 favour to the former.”
In other words, free trade implies complete freedom of international exchange. Under such a policy there are no barriers to the movement of goods among countries and exchange can take its perfectly natural course.
Classical economists like Adam Smith, Ricardo and others pleaded for free trade for the welfare of the world.
Advantages of Free Trade:
The following arguments have been advanced in favour of free trade policy:1. Comparative cost advantage:
Free trade is the natural outcome of the comparative costs advantage. It permits an allocation of resources, and manpower in accordance with the principle of comparative advantage, which is just an extension of the principle of division of labour.
“The fact of free trade establishes an overwhelming presumption that the commodities obtained from abroad in exchange for export are so obtained at lower cost than which the domestic production of their equivalents would entail. If this were not the case, they would not be imported, even under free trade,” says Jacob Viner.
It has been maintained that the gain from free international trade would be the largest due to international specification based on comparative advantage. Free trade leads to the most efficient conduct of economic affairs. In a plea for free trade, they also said that even if some countries do not follow the policy of free trade, an industrial country should follow it unilaterally and it will gain thereby.
2. More factor earnings:
Under free trade, factors of production will also be able to earn more, as they will be employed for better use. Hence, wages, interest and rent will be higher under free trade than otherwise.
3. Cheaper imports:
Free trade procures import at cheap rates. It seems to be an attractive argument in favour of trade at least from the customer’s point of view. However, it ignores the question of employment and the interests of producers in the importing country. Here it has been pointed out that under free trade, when consumers gain through lower prices producers also gain as the factors of production are directed to more gainful and specialised production which gives better earnings.
4. Enlarged market:
Free trade widens the size of the market as a result of which greater specialisation and a more complex division of labour become possible. This brings about optimum production with costs reduced everywhere, benefiting the world as a whole.
5. Competition:
Free trade policy encourages competition from abroad which induces domestic producers to become more alert and improve their efficiency.
6. Restricted exploitation:
Free trade prevents growth of domestic monopolies and consumers’ exploitation due to competition from abroad.
7. Greater welfare:
Free trade permits large varieties of consumption goods and improves consumer’s welfare.
Haberler concludes that, “international trade has made a tremendous contribution to the development of less developed countries in the nineteenth and twentieth century’s and can be expected to make in the future if it is allowed to proceed freely.”
Thus, free trade is the best commercial policy.
Disadvantages of Free Trade:
However, the following disadvantages of free trade policy have been mentioned by many critics:1. Free trade policy runs smoothly if all the countries follow the same. If some countries do not adopt it, the system cannot work gainfully.
2. Free trade may prove advantageous to developed and technologically advanced nations, but less developed countries are certainly at a disadvantage on account of unfavourable terms of trade.
3. Competition induced under free trade is unfair and unhealthy. Backward countries cannot compete with advanced countries.
4. Gains of trade are not equally distributed under free trade due to unequal state of development of different countries.
5. A country with unfavourable balance of payments finds it difficult to overcome this situation under free trade policy.
6. Free trade may encourage interdependence and discourage self-sufficiency. But, in the matter of defence each country should have self-reliance and self-sufficiency as far as possible.
Despite the clamour of the classical economists about the advantages of the free trade, the policy has either not been adopted by many countries or abandoned by those who had already adopted it. Economic history indicates that for the last two centuries, international trade has developed with protection.
Free trade policy has been abandoned by all countries for the following reasons:
(i) Under the system of free trade, the underdeveloped countries suffer very much in competing with the advanced countries. For instance, free trade policy in India adopted by the British Government proved that the onetime flourishing industries (handicrafts) of India were completely wiped out due to foreign competition.
(ii) Governments under free trade observed political handicaps due to economic interdependence. For political independence, economic independence was inevitable; hence free trade had to go.
(iii) Countries cannot allow free import of injurious and harmful products; hence trade restrictions are necessary.
(iv) Free trade led to cut-throat competition in the world market, so that exporters resorted to dumping, which no government can allow beyond a limit; thus, restrictions become inevitable.
(v) Backward countries have to protect their infant industries and hence cannot adopt the policy of free trade.
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