theory of commercial policy-ba 2020-21 abel197
FREE TRADE
MEANING
Free trade policy refers to a trade policy without any tariffs, quantitative restrictions and other
devices obstructing the movement of goods between countries. Prof. Jagdish Bhagwati define free
trade policy, "as absence of tariffs, quotas, exchange restrictions, taxes and subsidies on
production, factor use and consumption". Prof. Lipsey gives 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 them at home."
Thus the policy of free trade means simply complete freedom of international trade without any
restrictions on the movement of goods between countries. However, there is an exception. Import
duties can be levied for revenue and not for protection even under free trade. Here even after duty
it is cheaper to purchase from the partner country. Thus a country following the free trade policy
levies import duties which are lower than the cost advantage enjoyed by the lowest cost foreign
good.
THE CASE FOR FREE TRADE
The classical economists were in favour of the free trade policy. Of the modern economist
Haberler2 advanced the following arguments in favour of free trade.
1. Maximization of Output.
Under free trade as per comparative advantage, a country specializes 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 maximizes 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 maximization of output income and employment.
2. Optimum Utilization of Resources.
Free trade leads to international specialization and geographical and territorial division of labour.
Each country specializes in the production of those goods for which it has abundant supply of
natural resources.
As a result, the existing resources in each trading country are employed more productively and the
resource allocation becomes more efficient.
3. Optimization of Consumption.
Free trade benefits the consumers when they are able to buy a variety of commodities from abroad
at the minimum possible prices. This, in turn, has the effect of raising their standard of living.
4. High Factor Incomes.
, theory of commercial policy-ba 2020-21
Under free trade, there is perfect mobility of factor of production. They can move from one place
to another and between countries in order to earn more. Thus factor incomes such as wages,
interests, rents and profits are high under free trade. There is increase in the real income of the
world economy and of its participant countries.
5. Educative Value.
According to Haberler, free trade has an educative value. International competition encourages
home producers to sacrifices leisure in order to increase productivity, for this, they innovate and
bring improvements in organization and methods of production.
6. Wide Markets.
Free trade leads to wide extent of markets for goods. As the demand for goods is not confined to
one country but to a number of countries, the entire world becomes the market for all types of
goods. This leads to the production of quality goods at low prices because of world competition.
7. Prevents Monopolies.
Under free trade each country specializes 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.
8. Encourages Inventions.
Free competition and trade encourage nations to produce the best and the cheapest products in
order to gain more. It stimulates them to invent new techniques and processes of production, to
find new markets, new sources of raw materials, etc.
9. Develops Transport and Communications.
Free trade encourages the development of the means of transport and communications not only
within countries but also among countries. Rail, road, sea and air transport systems expand with
better cargo. The development of internet, E-Mail and E-Commerce has been possible due to more
freed trade globally.
10. Promotes International Co-operation.
To solve bilateral and multilateral trade problems, different countries come into contact with each
other, hold trade talks with among each other. International organizations like WTO arrange to
solve trade problems and promote international co-operation.
11. Policy for Economic Development.
Free trade fosters economic development in the following ways:
FREE TRADE
MEANING
Free trade policy refers to a trade policy without any tariffs, quantitative restrictions and other
devices obstructing the movement of goods between countries. Prof. Jagdish Bhagwati define free
trade policy, "as absence of tariffs, quotas, exchange restrictions, taxes and subsidies on
production, factor use and consumption". Prof. Lipsey gives 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 them at home."
Thus the policy of free trade means simply complete freedom of international trade without any
restrictions on the movement of goods between countries. However, there is an exception. Import
duties can be levied for revenue and not for protection even under free trade. Here even after duty
it is cheaper to purchase from the partner country. Thus a country following the free trade policy
levies import duties which are lower than the cost advantage enjoyed by the lowest cost foreign
good.
THE CASE FOR FREE TRADE
The classical economists were in favour of the free trade policy. Of the modern economist
Haberler2 advanced the following arguments in favour of free trade.
1. Maximization of Output.
Under free trade as per comparative advantage, a country specializes 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 maximizes 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 maximization of output income and employment.
2. Optimum Utilization of Resources.
Free trade leads to international specialization and geographical and territorial division of labour.
Each country specializes in the production of those goods for which it has abundant supply of
natural resources.
As a result, the existing resources in each trading country are employed more productively and the
resource allocation becomes more efficient.
3. Optimization of Consumption.
Free trade benefits the consumers when they are able to buy a variety of commodities from abroad
at the minimum possible prices. This, in turn, has the effect of raising their standard of living.
4. High Factor Incomes.
, theory of commercial policy-ba 2020-21
Under free trade, there is perfect mobility of factor of production. They can move from one place
to another and between countries in order to earn more. Thus factor incomes such as wages,
interests, rents and profits are high under free trade. There is increase in the real income of the
world economy and of its participant countries.
5. Educative Value.
According to Haberler, free trade has an educative value. International competition encourages
home producers to sacrifices leisure in order to increase productivity, for this, they innovate and
bring improvements in organization and methods of production.
6. Wide Markets.
Free trade leads to wide extent of markets for goods. As the demand for goods is not confined to
one country but to a number of countries, the entire world becomes the market for all types of
goods. This leads to the production of quality goods at low prices because of world competition.
7. Prevents Monopolies.
Under free trade each country specializes 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.
8. Encourages Inventions.
Free competition and trade encourage nations to produce the best and the cheapest products in
order to gain more. It stimulates them to invent new techniques and processes of production, to
find new markets, new sources of raw materials, etc.
9. Develops Transport and Communications.
Free trade encourages the development of the means of transport and communications not only
within countries but also among countries. Rail, road, sea and air transport systems expand with
better cargo. The development of internet, E-Mail and E-Commerce has been possible due to more
freed trade globally.
10. Promotes International Co-operation.
To solve bilateral and multilateral trade problems, different countries come into contact with each
other, hold trade talks with among each other. International organizations like WTO arrange to
solve trade problems and promote international co-operation.
11. Policy for Economic Development.
Free trade fosters economic development in the following ways:
