Free Trade Policy . (Meaning , Advantages , Disadvantages)

What is Free trade policy?

Free trade policy refers to a trade policy without any tariffs , quantitative restrictions and other devices obstructing the trade of goods between countries ..

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 impose additional burden on the latter nor grants any special favour to the former “

The theoretical case for free trade is based on Adam Smith’s argument about absolute comparative advantage , that the division of labour among countries leads to specialization, greater efficiency, and higher aggregate production.

Free trade therefore , signifies a non discriminatory trade policy that places no artificial barriers upon free international movement of goods and services .

Definitions :-

Prof Jagdish defines free trade policy as , ” absence of tariffs , quotas, exchange restrictions , taxes , subsidies on production , factor use and consumption “

Prof Lipsey gives a very simple definition ,
“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 at home .”

In Haberler’s words , ” free trade is the external trade system of liberation which opposes every interference by the state with the free play of economic forces .”

Thus ,the policy of free trade means simply complete freedom of international trade without any restrictions on the movement of goods between countries.

Free trade, also called laissez-faire,
a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports).

However sometimes, governments with generally free-trade policies still impose some measures to control imports and exports.
For instance , in the United States, most industrialized nations negotiate “free trade agreements(FTA ),” or , with other nations which determine the tariffs, duties, and subsidies the countries can impose on their imports and exports.

Theories Of Free Trade :-


The years of debates over the benefits versus the costs of free trade policies to domestic industries, two predominant theories of free trade have emerged: mercantilism and comparative advantage.

Mercantilism

The theory of maximizing revenue through exporting goods and services is Mercantilism. High tariffs on imported manufactured goods are a common characteristic of mercantilist policy.
Mercantilist policy helps governments avoid trade deficits, in which expenditures for imports exceeds revenue from exports.
The goal of mercantilism is a favorable balance of trade, in which the value of the goods a country exports exceeds the value of goods it imports.
Mercantilism lost its popularity as it often led to colonial expansion and wars.

Today many multinational organizations such as the WTO work to reduce tariffs globally, free trade agreements and non-tariff trade restrictions supersede mercantilist theory.

Comparative Advantage

David Ricardo in his book “Principles of Political Economy and Taxation,” 1817 , stated the law of comparative advantage which refers to a country’s ability to produce goods and provide services at a lower cost than other countries.
The Comparative advantage theory is that worldwide openness in trade will improve the standard of living in all countries.
Comparative advantage holds that all countries will always benefit from cooperation and participation in free trade.

Advantages ( pros ) of Free Trade Policy.

Free trade policy has many advantages for a country.
The following are some pros of free trade policy :-

1: Maximum of Output :- Under free trade the country specialises in the production of those commodities which it is relatively best suited to produce and exports them in exchange for those imports which it can obtain more cheaply . This maximises the output of all the participating countries because all gain from trade which in turn , increases the real national income of the world economy . Thus free trade leads to the maximisation of output income and employment.


2: 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 advantage of specialisation . If there were no international trade many countries would have to go without some products .

3: Optimisation of Consumption :-
Free trade secures the optimisation of consumption . In other words ,it benefits the consumers when they are able to buy a variety of commodities from abroad at the minimum possible prices . This results in raising their standard of living .

4:. Link with others 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 reduces the possibility of commercial rivalry and war .

5:. Prevent Monopolies :-
Free trade prevents the establishment of monopolies . Under free trade, the country specialises in the production of a few commodities ,and the firms or industries are of the optimum size so that the cost of production of each commodity is the minimum . Thus , free trade ensures a lower price for exports as well as imports and the price mechanism under perfect competition prevents the formation of Monopolies.

6:. Higher Efficiency and optimum Utilisation of Resources :-
Free trade stimulates home producers who face to foreign competition to put forth their best efforts and thus increase managerial efficiency . Again as under free trade each country produces those goods in which it has the best advantages , the resources of each country are utilised in the best possible manner.

7:. Best policy for Economic Development :-
Haberler points out that “substantial free trade with marginal insubstantial corrections and deviations is the best policy from the point of view of economic development “
Besides the direct gains of free trade noted above , free trade fosters development in the following ways
(a) it leads to the importation of capital goods , and raw material ;
(b) it instills new ideas and brings technical know-how, skills , managerial talents and entrepreneurship to the developing countries ;
(c) it facilitates the flow of foreign capital and fosters healthy competition and checks inefficient and exploitative monopolies.


Disadvantages ( cons ) of Free Trade

Despite having several advantages , there are certain theoretical and practical difficulties in following free trade policy .

Some of those disadvantages are :-

1:
Excessive dependence :- Free Trade policy leads to unwanted dependence for goods among countries which leads to major problems in a countries economy if there is some conflicts between the Countries due to some matter .

2:
Obstacles to 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 .

3:
Empire Builder :- Under the free trade the foreign traders particularly the dominant ones may try to become empire builders in future . In the past it is see ,free trade gave rise to colonialism and imperialism.

4:
Import of Expensive Harmful Goods :- With no restrictions it’s easy to import expensive harmful foreign goods . This leads to diminution of social welfare . Trade restrictions on import goods become necessary.

5:
Less job opportunity :- While free of tariffs, products imported from foreign countries may be seemingly good for consumers, it makes it hard for local companies to compete, forcing them to reduce their workforce. It causes job loss through outsourcing: Tariffs tend to prevent job outsourcing by keeping product pricing at competitive levels. with lower wages cost less.



In conclusion , we can say that at present no country in the world follows the policy of free trade . Every country imposes some restrictions on the import and export of goods .
T.Scitovsky has pointed out that free trade can be shown to be beneficial to the world as whole but has never been proved to be the best policy for a country .


However , poor countries that have adopted free-trade policies have experienced high economic growth, with China and India as prime examples. Free trade allows companies from rich countries to directly invest in poor countries, sharing their knowledge, providing capital and giving access to markets.