In this article we will discuss about the advantages and disadvantages of free trade.
Advantages of Free Trade:
The advocates of free trade put forward the following advantages of free trade:
(a) International Specialization:
Free trade causes international specialisation as it enables the different countries to produce those goods in which they have comparative advantage. International trade enables countries to obtain the advantages of specialisation. First, a great variety of products may be obtained.
If there were no international trade, many countries would have to go without some products. Thus, Iceland would have no coal, Nepal no oil, Spain no gold and Britain no tea. Second, specialisation leads to an increase in total production.
(b) Increase in World Production and World Consumption:
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International trade permits an industry to take full advantages of the economies of scale (large-scale production). If certain goods were produced only for the home market, it would not be possible to achieve the full advantage of large-scale production. So, free trade increases the world production and the world consumption of internationally traded goods as every trading country produces only the selected goods at lower costs.
(c) Safeguard against the Advent of Monopolies:
Thirdly, if there were no international competition, the home market would be so narrow that it would be comparatively easy for the combinations of firms in many industries, e.g., motor cars, paper and electrical goods, to exercise some control over it. Free trade is often an efficient way of breaking up domestic monopolies.
(d) Links with Other Countries:
International trade and commercial relations often lead to an interchange of knowledge, ideas and culture between nations. This often produces a better understanding among those countries and leads to amity and theory reduces the possibility of commercial rivalry and war.
(e) Higher Earnings of the Factors of Production:
Furthermore, free trade increases the earnings of all the factors as they are engaged in the production of those goods in which the country has comparative advantage. It would increase the productivity of each factor.
(f) Benefits to Consumers:
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On account of free trade the consumers of the different countries get the best quality foreign goods, often of a wider range of choice, at low prices.
(g) Higher Efficiency and Optimum Utilisation of Resources:
Free trade stimulates home producers, who face to foreign competition, to put forth their best effort and thus increase managerial efficiency. Again, as under free trade each country produces those goods in which it has the best advantages, the resources (both human and material) of each country are utilised in the best possible manner.
(h) Evil Effects of Protection:
Free trade is also advocated because it can remove the evil effects of protection, such as high prices, growth of monopolies, etc. It is also immune from such abuses as ‘corruption and bribery’ and the creation of vested interests which often arise under a protectionist system.
Disadvantages of Free Trade:
But, free trade is opposed on several grounds.
(a) Excessive Dependence:
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As a country depends too much on foreign countries, an outbreak of war may upset its economy. During the 1991 Gulf War America refused to sell its products to its enemies (i.e., Gulf countries).
(b) Obstacles to the Development of Home Industries:
If foreign goods are imported freely, the domestic industries of the developing countries would not be able to develop rapidly due to the superior strength of foreign industries.
(c) Empire-Builder:
Under free trade, the foreign traders particularly the dominant ones may try to become empire-builders in future. In the past free trade gave rise to colonialism and imperialism.
(d) Import of Expensive Harmful Goods:
A country may also import expensive and harmful foreign goods.
(e) Rivalry and Friction:
Finally, free trade sometimes creates rivalry and frictions among the trading nations. In other words, commercial rivalries resulting from trade often lead to war. This is an important point.
Conclusion:
At present times, no country in the world follows the policy of free trade. Every country imposes some restrictions on the import and the export of goods in the broader interest of the country. Finally, as T. Scitovsky has pointed out, free trade can be shown to be beneficial to the world as a whole but has never been proved to be the best policy for a single country.