Essay on Free Trade | International Economics

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Essay # 1. Meaning of Free Trade:

The policy of free trade is one which does not impose any tariff or non-tariff restrictions upon free exchange of goods and services between the trading countries. Such a policy permits a country to buy and consume those goods, which it either cannot produce at all or can produce only at a higher cost. Similarly it can dispose of in foreign markets, without encountering any restriction or hindrances, those products or services in the creation of which it has the comparative cost advantage.

According to Adam Smith, the policy of free trade is “a system of commercial policy which draws no distinction between the domestic and foreign commodities and thus neither imposes additional burden on the latter nor grants any special favour to the former.” The free trade, therefore, signifies a non-discriminatory trade policy that places no artificial barriers upon free international movement of goods and services. In the words of Haberler, “…. free trade is the external trade system of liberalism which opposes every interference by the state with the free play of economic forces.”

The essence of free trade, in the opinion of Jagdish Bhagwati, is the complete absence of restrictions upon free exchange of goods and services. Free trade, to quote him, is the complete “absence of tariffs, quotas, exchange restrictions, taxes and subsidies on production, factor use and consumption.”

In this regard, R.G. Lipsey writes, “…… a world of free trade would be one with no tariffs and no restrictions of any kind on importing or exporting. In such a world, a country would import all those commodities that it could buy from abroad at a delivered price lower than the cost of producing them at home.”

A policy of free trade, no doubt, implies an absence of trade barriers but the imposition of import duties for the consideration of obtaining revenues may be consistent with free trade, when these are not meant either to provide protection to home industries or to discriminate against the cheap imports from abroad. It may be explained through an illustration. Suppose the home country A imposes an import tariff of 15 percent on the product of foreign country B. The latter has cost advantage over country A, say by 25 percent.

In such a situation, country B continues to enjoy cost advantage over A despite the imposition of import levy. The flow of goods from B to A can still take place unhampered. At the same time, country A becomes able to secure revenues from imports. The import duty, in such a case, does not violate the principle of free trade. In brief, the policy of free trade means non-resort to any direct or indirect restraint upon the international flow of goods and services.

Essay # 2. Arguments for Free Trade:

The philosophy of laissez faire in the field of international trade came into prominence as a reaction to Mercantilist advocacy of trade barriers. The powerful voice in support of free trade was raised by Locke, Hume and Adam Smith. A renowned line of economic thinkers, including Ricardo, J.S. Mill, Bastable, Marshall and Haberler lent strong support to the cause of free international trade.

The main arguments in support of free trade are as follows:

(i) Maximisation of World Output:

If there is no tariff or non-tariff restriction upon international trade, every country is likely to specialise in the production and export of that commodity in which it has the greater comparative advantage or the least comparative disadvantage. The benefits of specialisation and division of labour can become available to all the trading countries and they will be able to make the optimum use of their productive resources.

As a consequence, the world output is likely to get maximised. When each trading country produces those commodities in the production of which it is most suited and imports those commodities, which it can procure more cheaply from abroad rather than producing them itself, the real incomes of all the trading countries are likely to rise. In this context Ellsworth remarked, “…. Since the income of any community or nation is large just in proportion to the extent to which it specialises, the greater possible freedom of trade is justified.”

(ii) Optimum Use of Resources:

The free trade leads not only to specialisation in production but also to factor specialisation. The diversion of all scarce productive resources to such industries where their productive efficiency is the maximum implies their ideal or optimum utilisation. In the conditions of free trade, there is little possibility of under-utilisation or wastage of scarce resources. Any scarcity of productive factors, at the same time, can be easily off-set through their import from foreign countries. Thus free trade paves the way for the optimisation of productive factors throughout the world.

(iii) Large Factor Incomes:

In the condition of free trade, the factor units can easily and quickly move either within the same country or between different countries for securing larger remuneration for their services. It is, therefore, possible that factor incomes such as wages, rents, interests and profits are higher under free trade than otherwise.

(iv) Optimisation of Consumption:

The free international trade enables a country to import products from the cheapest market and relieve the domestic shortages of goods. It also provides opportunities for the consumers to import and use superior varieties of products. The increased availability of consumable goods of better varieties at low prices assures the optimisation of consumption in the trading countries.

(v) Enlargement of Market:

The absence of restrictions upon trade results in an enlargement of the size of market as every country can dispose of its surplus production in foreign markets. Products of all countries can have global demand. The extension in the size of market gives strong inducement to raise production and investment, to introduce improved techniques, and to introduce new, superior and cheaper varieties of products.

(vi) Check on Monopolies:

Free trade implies free competition. The producers from different countries try to expand their sales in the markets of other countries. The price competition and introduction of newer varieties of products prevent the emergence of exploitative monopolies. In this connection, it must be pointed out that free trade does not provide a complete safeguard from monopolies. Even under free trade, there can be emergence of natural monopolies or strong local or international cartels capable of restricting output and manipulating prices.

(vii) Educative Effects:

Haberler explained that free international trade can inculcate in the population of a country such qualities as competit­iveness, inventiveness, urge for excellence, efficiency, acquisition of advanced skills in production, management and organisation. These educative effects emanating from free trade make the trading countries to achieve higher production frontiers.

(viii) Accelerated Development:

Haberler has greatly emphasized upon free trade as a means for accelerating the process of economic transformation in the developing countries. According to him, free trade can contribute in the process of growth in different ways.

Firstly, it enables the unrestricted import of raw materials and capital goods, which are essential for industrial expansion.

Secondly, free trade assists in an easy transfer of advanced technical know-how and entrepreneurship from the advanced to the less developed countries.

Thirdly, free trade facilitates large scale international capital movements to speed up the process of growth.

Fourthly, free trade promotes competition, efficiency and productivity and can create such capacities in the poor countries, which enable them to achieve higher levels of production, employment and income.

Essay # 3. Arguments against Free Trade:

Despite strong classical advocacy of free trade, the world drifted away from free and unrestricted trade. The less developed countries have been viewing it as an instrument of colonial exploitation. Even the advanced countries have been taking recourse to restrictions upon international trade for the realisation of their economic and trade interests. A number of theoretical and practical objections are raised against the policy of free trade.

The main arguments against it are as follows:

(i) Absence of Pre-Requisites of Free Trade:

The theoretical objection against the policy of free trade is that conditions necessary for it do not actually exist in the real life. Some of pre-requisites of free trade policy are prefect competition, perfect factor mobility, free working of price system and laissez faire. The absence of these requirements invalidates this policy altogether.

(ii) Cut-Throat Competition:

The free international trade leads to chaotic trade conditions because the advanced countries try to capture more and more foreign markets for their products by dumping their products at very low prices in other countries. This intense competition has serious destabilising effects particularly upon the LDC’s. For instance, flourishing Indian handicrafts were completely wiped out in the nineteenth century on account of relentless competition from the British mill-made manufactures.

(iii) Lop-Sided Development:

Free trade underlines the specialisation in production and export in these industries in case of which a given country has comparative cost advantage over others. The adoption of this principle means that other industries and sectors should remain undeveloped. The less- developed countries, which have comparative advantage in agriculture, will remain condemned as agricultural countries alone. Such lop-sided or unbalanced growth has serious economic and social consequences.

(iv) Excessive Foreign Dependence:

When a country adopts a policy of free trade on the basis of the principle of comparative cost advantage, it becomes excessively dependent upon the foreign country for the disposal of its production and for the import of varied products. Such an excessive dependence is detrimental to its interests both in the times of peace and war.

(v) International Transmission of Fluctuations:

The free trade results in the transmission of prosperity or depression from one country to another. For instance, if country A is plagued by recession or depression, the fall in purchasing power of the people causes a reduction in its imports. The reduced imports signify the reduction in the exports of country B.

A decline in exports of country B causes a reduction in income. Thus, the fluctuations get transmitted from one country to the other and an economic crisis assumes global proportions. The trade restrictions can effectively prevent such a possibility.

(vi) Import of Harmful Products:

Where there are no restrictions upon trade, there is a danger of large inflow of harmful and sub-standard products from abroad. The unrestricted import of such commodities is injurious for the health and efficiency of the people. It will have the effect of reducing the welfare of the society. In view of such adverse implications of free trade on social welfare function, the countries, at some stage, feel compelled to adopt restrictive measures.

(vii) Emergence of Monopolies:

The free international trade and intense foreign competition eliminate many business firms. Consequently, local monopolies or international cartels emerge. Their manipulation of supply and price to maximise profits results in the exploitation of people and hinders the free working of price system. The possibility of emergence of monopolies necessitates the imposition of restrictive measures upon trade.

(viii) Detrimental for Development:

Haberler’s viewpoint that free trade stimulates development process in LDC’s is difficult to be accepted by their economists and statesmen. The international exploitation of the raw materials and markets of the poor countries by the advanced countries through free trade for the last two centuries is ample evidence of the fact that it has serious adverse effects upon the growth process of the former. The development of infant industries and subsequent industrial diversification are unlikely to take place unless effective restraints upon foreign imports are enforced by the less developed countries.

In view of the reasons given above, both advanced and less developed countries have continued to drift away from the policy of unrestricted international trade since the First World War. No doubt, the international monetary and trade organisations have their avowed goal of re­establishing restriction-free trade, much success has, however, not been achieved in this direction.