The following points highlight the arguments in favour of free international trade.
1. A country can produce some commodities but not others. The reasons may be that a country’s climate is unsuited to producing some commodities. India, for instance, cannot produce oil or coffee on a large commercial scale. Alternatively, a country may not possess the necessary raw materials required to produce certain commodities. India, for example, has few deposits of iron ore.
2. A country can produce one commodity better than another. Suppose country X is able to produce a commodity better than country V and decides to specialise in producing it. Country Y, however, may be able to produce another commodity better than country X. Country Y, therefore, may decide to specialise in this other product.
After specialising in producing the commodity to which each country is best suited, the countries will then decide to trade with each other. The UK, for instance, can produce wine but perhaps not as cheaply or in such qualities as France. France will therefore provide the UK with much of its requirements of wine in exchange for, say, high class woollen garments not available in France.
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3. One country may be able to produce two (or more) commodities better than another country. However, the former will only produce the commodity in which its comparative advantage is greater and allow the latter to produce the other product. This is called the theory of comparative cost. This point can now be explained further.
Adam Smith further points out that division of labour within a country results in an increase in total output of goods and services. Just as division of labour within a firm can be extended to division of labour within the industry, so division of labour within a country can be extended into the international sphere.
Countries tend to specialise in those commodities which depend for their production on the abundant resources of the country. So, a country will import those commodities the production of which requires the country’s scarce resources.
Thus, countries possessing an abundance of land relative to labour will tend to specialise in agricultural products, and will export these products for the manufactured goods made by countries having an abundance of labour relative to land. Australia, for example, produces wool and mutton because of large land areas and a suitable climate; Canada produces wheat for similar reasons.
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Countries specialise, therefore, in the production of certain goods and exchange a part of their total output for goods made in other countries. International trade is the extension of the principle of the division of work to the international sphere. It is based on international division of labour and specialisation.
International trade would, however, be very limited if countries merely exchanged those commodities which others could not produce. All countries import items that could be home-produced, if necessary. For example, India imports manufactured products which can be produced very well at home.
She does not, however, specialise in the production of food articles because she can produce other things, such as light manufactured goods, more advantageously. Similarly, Britain imports cheap cotton cloth from India although she could produce it herself.
Each country tends to specialise in the production of just a few of the things that it is capable of producing. A country’s choice of the forms of production in which to specialise will be determined by its ability to produce certain things more cheaply than other countries.
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For example, if India can offer a T.V. set at Rs 10,000 and a car at Rs 1 lakh, while Bangladesh can offer the same at Rs 20,000 and Rs 3 lakhs, respectively, it will be more advantageous for India to produce only cars and for Bangladesh to specialise in T.V. This is known as the principle of comparative cost (advantage). One object of international trade is to take advantage of the comparative cheapness of commodities in other countries.