Arguments for and Against Free Trade |
Trade Policy
Let us learn about Arguments for and Against Free Trade.
Arguments for Free Trade:
i. Advantages of Specialization:
Firstly, free trade secures all the advantages of international division of
labour. Each country will specialize in the production of those goods in
which it has a comparative advantage over its trading partners. This will
lead to an optimum and efficient utilization of resources and, hence,
economy in production.
ii. All-Round Prosperity:
Secondly, because of unrestricted trade, global output increases since
specialization, efficiency, etc., make production large scale. Free trade
enables countries to obtain goods at a cheaper price. This leads to a rise
in the standard of living of people of the world. Thus, free trade leads to
higher production, higher consumption and higher all-round international
prosperity.
iii. Competitive Spirit:
Thirdly, free trade keeps the spirit of competition of the economy. As
there exists the possibility of intense foreign competition under free
trade, domestic producers do not want to lose their grounds. Competition
enhances efficiency. Moreover, it tends to prevent domestic monopolies
and free the consumers from exploitation.
iv. Accessibility of Domestically Produced Goods and Services:
Fourthly, free trade enables each country to get commodities which it
cannot produce at all or can only produce inefficiently. Commodities and
raw materials unavailable domestically can be procured through free
movement even at a low price.
v. Greater International Cooperation:
Fifthly, free trade safeguards against discrimination. Under free trade,
there- is no scope for cornering raw materials or commodities by any
country. Free trade can thus promote international peace and stability
through economic and political cooperation.
vi. Free from Interference:
Finally, free trade is free from bureaucratic interferences. Bureaucracy
and corruption are very much associated with unrestricted trade.
In brief, restricted trade prevents a nation from reaping the benefits of
specialization, forces it to adopt less efficient production techniques and
forces consumes to pay higher prices for the production of protected
industries.
Arguments against Free Trade:
Despite these virtues, several people justify trade restrictions.
Following arguments are often cited against free trade:
i. Advantageous not for LDCs:
Firstly, free trade may be advantageous to the advanced countries but
not to the backward economies. Free trade has brought enough misery to
the poor, less developed countries, if past experience is any guide. India
was a classic example of colonial dependence of UK’s imperialistic power
prior to 1947. Free trade principles have brought colonial imperialism in
its wake.
ii. Destruction of Home Industries/Products:
Secondly, it may ruin domestic industries. Because of free trade,
imported goods become available at a cheaper price. Thus, an unfair and
cut-throat competition develops between domestic and foreign
industries. In the process, domestic industries are wiped out. Indian
handicrafts industries suffered tremendously dining the British regime.
iii. Inefficiency becomes Perpetual:
Free trade cannot bring all-round development of industries. Compara-
tive cost principle states that a country specializes in the production of a
few commodities. On the other hand, inefficient industries remain
neglected. Thus, under free trade, an all-round development is ruled out.
iv. Danger of Overdependence:
Fourthly, free trade brings in the danger of dependence. A country may
face economic depression if its international trading partner suffers from
it.
The Great Depression that arose in 1929-30 in the US economy swept all
over the world and all countries suffered badly even if their economies
were not caught in the grip of the then Depression. Such overdependence
following free trade also becomes catastrophic during war.
v. Penetration of Harmful Foreign Goods:
Finally, a country may have to change its consumption habits. Because of
free trade, even harmful commodities (drugs, etc.,) enter the domestic
market. To prevent such, restrictions on trade are required to be
imposed.
In view of all these arguments against free trade, governments of less
developed countries in the post-Second World War period were
encouraged to resort to some kind of trade restrictions to safeguard
national interest.
