Doctrine of Free Trade and Causes of Protection

Doctrine of Free Trade:

A policy of no restrictions on the movement of goods between countries is known as the policy of Free Trade.

Restrictions placed with a view to safeguarding home industries constitute the policy of protection.

In the words of Adam Smith, this term ‘free trade’ has been 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 favours to the former.”

Free trade, however, does not require the removal of all duties on commodities. It only insists that they shall be imposed only for revenue and not at all for protection. As a practical policy, free trade is based on the theory ofinternational trade. In the words of Cairnes, “If nations only engage in trade when an advantage arises from doing so, any interference with their free action in trading can only have the effect of debarring them from an advantage.”

Long before that wrote Adam Smith:

“If a foreign country can supply us with a commodity cheaper than we ourselves can produce, better buy it from them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

He continued further:

“Whether the advan­tage which one country has over another be natural or acquired is in this respect of no consequence. As long as one country has those advantages and the other wants them, it will always be more advantageous for the latter rather to buy of the former than to make.” The only exception that Adam Smith would make was industries necessary for defence. These might be protected since “defence is more important than opulence.”

The doctrine of free trade is the extension of the doctrine of division of labour to the international field. In the words of Adam Smith again, “Indivi­duals find it to their interest to employ their industry in a way in which they have some advantage over their neighbours.” And he adds, “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” In short, the free trade theory is that such a policy enables every country to devote itself to those forms of production for which it is best suited on the basis of comparative advantage.

Case for Protection for Under-developed Countries:

In spite of all the objections and dangers enumerated above, there is yet a strong case for protection, especially in the case of under-developed countries:

I. Protection in these countries brings about a fuller utilisation of the un-utilised or under-utilised natural resources.

II. Protection would also restrict imports and create demand for the home products, thereby giving a fillip to investment, employment and income.

III. Further, since in under-developed countries, there is an excessive dependence on agriculture, diversification is very much needed in these countries. Protection helps to bring about diversification in industries, and hence gives economic stability to them.

IV. Above all, the protection of infant industries is an absolute necessity in these countries. This argument for protection is of far greater importance in a country like India, which is rich in natural resources and, therefore, possesses vast potentialities for industrial growth. But owing to competition from other countries, Indian industries could not either be started or when started could not make rapid progress. Therefore, the affording of a protective umbrella to infant industries assumes a special significance in a country like India.

V. Infant Economy ‘Argument’. According to Prof. Gunnar Myrdal, the economies of most of the under-developed countries are unbalanced, and there are strong reasons for a protectionist policy to support industrialisation in them.

Myrdal refers to four special reasons for industrial protection in such countries to promote industrialisation:

(a) The difficulties of finding demand to match new supply;

(b) The existence of surplus labour;

(c) The large rewards of individual investments in creating external economies,

(d) lopsided internal price structure dis-favouring industry.

These reasons make out the infant economy case for protection from the point of view of industrialization.