Free Trade

A trade policy of placing no restrictions on the movement of good between countries is known as the policy of ‘Free Trade’ such a policy permits the flow of international commerce in its natural environment, free of artificial impediments.

According to Adam Smith, the term ‘free trade’ is used to denote ‘that system of commercial policy which drawn no distinction between domestic and foreign commodities and therefore, neither imposes additional burdens on the latter nor grants any special favour to the former.’ In other words, free trade implies complete freedom of international exchange. Under such policy there are no barriers to the movement of goods between countries and exchange can take its perfectly natural course.

The policy of free trade, however, does not require the removal of all sorts of duties on commodities in international exchange. It insists that duties may be imposed exclusively for revenue and not at all for protection.

Classical economists like Adam Smith, Ricardo etc. were enamored of the policy of free trade as a reaction against mercantilism dominating England and other continental countries into the sixteenth and seventeenth centuries. They argued that free trade was economically advantageous on the following counts:

1. It permits an allocation of resources and manpower in accordance with the principle of comparative advantage, which is just an extension of the principle of division of labour.

2. Under free trade, factors of production also will be able to earn more, as they will be employed for better use. Hence, wages, interest and rent will be higher under free trade than otherwise.

3. Free trade procures imports at cheap rate. It seems to be attractive argument in favour of free trade at least from the consumer’s point of view. However, it ignores the question of employment and the interest of producers in the importing country. Here it has been pointed out that under free trade when consumers gain through lower price; producers also gain as the factors of production are directed to more gainful and specialised production which gives better earnings.

4. Free trade widens the size of the market as a result of which greater specialization and a more complex division of labour become possible. This brings about optimum production with costs reduced everywhere, benefiting the world as a whole. Restrictions on free trade reduce the scope of specialization and in consequence there is a reduction of the total world supply, thereby making the world as a whole so much the poorer economically.

5. Free trade also widens the area of competition as a result of which the industrial techniques of the trading countries tend to be improved. Home producers are spurred by foreign competition to become more efficient and to adopt quickly any improvement in methods of production. In this way free trade has an educative effect.

6. Another incidental advantage of free trade is that it prevents, or at least makes more difficult, the establishment of injurious monopolies by preserving competition.

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