8.

1 Meaning of Free Trade

8.2 Case for Free Trade (or Advantages Claimed for Free Trade)
8.3 Arguments or Case Against Free Trade

rd
 ,
• ~G:/!!£!:-
8.1 MEANING OF FREE TRADE
Prof. Jagdlsh Bhagwati has defined free trade policy as "absence of tariffs, quotas
restrictions, taxes and subsidies on production, factor use and consumption."' ' e)(chang8
According to Prof. A.Cl Lipsey •a world of Free trade would be one wi!h no tariffs ane1 no restr ,
of any kind on importing and exporting. In such a world, a country would import
th8 t
~U
those comm lct'.~ns
0
that It would buy from abroad at a delivered price lower than coS of producing them at horne . ct1•t1 es
Tous, the policy of free trade among countries of the world implies complete freedo~ of interna .·
trade without ~ny kind of restrictions, dir~t or ln~irect, on move~ent of goods and services arno~'0naI
trading countnes. Under free trade pohcy, restrictions such as import duties, restrictions on G)( 9the
through taxes and other measures quota fixation and export subsidies and exchange control . Ports
eXist and there is free movement of goods and services, including capital movements from cos do no,
country, each country trying to sell its goods to a country ~hich would give the exp~rting cou~~try to
highest price for its exports and purchase goods and services . . from that
· country which would SUppl ry the
goods and services the country intends to import at the minimum price. Y
But some exceptions may be noted. Government of a c~untry m~y ~evy a small duty 0
import of some goods for the purpose of raising revenue and not with _t~e obJec~1v~ of pro~iding prot;tti~e
to home industries through such import duties from the compet1t1on of s1m1lar foreign goods Fn
example, if government of a country imposes a levy of, say 5 p~r cent per unit of _an _imported comm~t
when the comparative cost advantage in the ~ountry ~xporting th_at commod1t~ 1~, say 1oor even
per cent, such an import duty will not hamper 1ntemat1onal trade in that commodity which, in spit 01
the levy of import duty on that commodity, will continue to be imported as before which means
such an imposition of import duty will not be contrary to free trade. But if the relative cost advantage ~t
the case of production of a commodity in country A is 15 per cent compared to its cost of producti in
in country B, and if country B imposes an import duty of 15 per cent per unit of that commodity or ev~n
at a _highe~ rate, th~ idea in the case_ of sue~ im~~sition of import dut~ being to grant protection to th;
particular industry ,n country B against compet1t1on from co1,mtry A, in such a case imposition of th
import duty would be contrary to the principle of free trade. Only if a country imposes an import duty
a rate lower t~an the country_imposing s~ch an import d_uty is at a rate lower than the lowest cost ~f
adv~nta_ge ~nJoyed br a_fore1gn country, ti.cannot be said that the country imposing such an import
duty 1s v1olat1ng the pnnc1ple of fr~e trad_e.(Thus, even during the heydays of free trade (i.e., frorn 1a46
when !he_Com La~s were ~bollsh~d m England to the beginning of World War I in 1914), many
countries 1mpo~ed import du!1~s at fa1~ly low r_ates, the aim being to raise revenue for the state and not
to grant protection to domestic rndustnes against foreign competition. Such imposition of import duties
for purely revenue purpose did not mean violation of the principle of free trade.

·t 1~ btef• by th e principle of free trade is meant that a country is free t~ purchase any commodity
~o~~osdi;;~; i~~n~oc~n~z;:~e~=~r~:hat comm~dity is a~ailable at the lowest price and sell its
th
such trading transactions takin lac _n get e higheS t price for _the exported commodities - all
indirect hindrances in bringing ~iout: withh_out t th e ~overnm~nts of erther country placing any direct or
uc 1n ernat1onal tr~drng transactions.

1. Bhagwati J., (Ed.), International Trade, (1986), p.10.

(,,,o
riade: case for and Against

cASE FOR FREE T~ADE (OR ADVANTAGES CLAIMED FOR FREE TRADE)
•
9.2 al economists hke Adam Smith and David RI
ciass1cmodern economists like G. A. Haberler and 0~~~do were generally In favour of free trade

r·. ipleo
~iree
rlJl'.f,Y·M8 trade among the nations of the world on the fOr~ have. made out acase In favour of the
owing grounds: .
p11oC Trade Results in Maximisation of World Out ut·
in
(1) fret8advantage, every country would specialise th Acco~dlng to the principle~~9~"Dparatly~
8

rt: best suited or in other terms, in the productlo pr? uctlon of that commodity for which
ntage or the least disadvantage. There!ore d~i°' which 11 has comparatively the greatest
8 dfvision of labour or specialisation on lnter~atio~=l~~ountrie~would practise th~ principle
o1ods tor which they are coniparativeiy'best suited and~ne pro uclng and exporting those
! ~ich the,Y are relatively !ass or leas_t s~lted. This means
conseque~t on the adoption of _the principle of free trade, resou~_e~_~f t.b~-~.9.r!Q Y{.QlJld_ b~ put
to the rnax~~u~,-~~e re~ulting in ~ axim~m ~9-~lq Qutput which would be to the advantage oi
all the part1c1pat~ _g ~~9~!!9 CO!J.nfries.of the world. · ·· -· ·· •.
( ) Free Trade Ensures Optimum U!ili~atio? of World's Productive Resources: Under the regime
2 of tree trade, each cou~try spec1ahses in the production of tho,se commodities for which it is
best suited. Naturally, mternatjQMI division.of labour or spectalisation consequent on the
ador:,tion of free trade results in the optimaf ormcist efficient use of production rEi°sources of
the world. - ·· · · ·· · ·· ·· · · · -- ·

( ) Free Trade Ensures Optim~sation of Consumption of Peoples in the World: The principle of
3 tree trade among the countries of the world would result in international division of labour and
in putting the world's resources to the maximum possible use in other terms enabling them
to produce those goods for which they h~ve the greatest comparative cost advantage (or the
least comparative disadvantage). This would result in optimum prodv ~goods, thus
enabling opti~u_m_l~wel of consu~ption.to the peop1esof ~be w~rld. Ea~h cou~ _~ uld
pu·rchase foreign goods and services at the cheapest p~~s1b!e: pnce.s wbtch.wDuld enable
people... to raise ~o_ihe'rrj:axi~um their:standarc fof fiving.
___ . ·----·- ---~.
.,_., •. -· ...
· .
(4) Free Trade Would Result in Widening of Markets: As the principle of free trade abs~!1£e
of all types of restrictions on international movements_oJ.999d~.§OdJ;~_ryjg.Q, tha.t w uldJ~§.ult
in widening of markets for different 9.of!im9'1!ti~f~nd-services. In effect, markets for different
commodities would be world markets. Also, because of ke~n competition to capture as wide
apart of international market as possible, there would result improve';l_~~~in tj~~ilt9!_ 99,ods
and services which would also be available to consumers all over the world at the lowest
po~sible prices. · ·· ,
(SJ Free Trade Would Prevent Emergence of Monopolies: Because of the regime of free trade,
each country would be specialising in the production of a few commodities and services
according to the principle of comparative cost advantage. Due to prevai!i~g con:ipetitiq~p ~ong nd
the countries of the world each industrial unit would try .to be of the.. optimum size a
PF~duce and sell go.ods at the.lO'N8St_p9s~ible_~rice. /(nd,J~erefo~e, the principl~_~f f~ea trad~
and open international con:,petition·would_preyent.emer.gencQ9f !n9!1°.P9fles with pow.er
to manipulate output and prices of goods 'to the detr_ iment of public good an_d waifare.
 ---~.!.::::::z::::::S:;;.;:::::::S::::1:ZS .
• .,_.,......-..__. . of Economic Development of Dsve/opfng Co
Free rtade Is the Most Eff,d9{ll Tool I r rrae trade Is the most lavourabio P untrt0~.
I
(6} claimed that adOption of the prh'~i~~trtes. The policy of free trade would ona~i~cy lor r~11 1~

f:
ecooomlc oowlopnO"l of backWa . d ssentlal raw materials, technologlca1kn dove1ofjP1ri
countries Into tmport capitaI good:i 1 aned knowledge from the bast available soi~·how
managerial and organisational ,s .. 1 turally this would help the process of ropid es nnu I
·1 sand prices. ,..,a , f .t • rt th Elco ill
lhe towest possible t~ e .
•
1 they would be rea o 1mpo ese devei nornl(,
development or ba~kward countr es as oprnen1ai
goods without any hindrance. .
. er en's Qualities: According to Prof. Haberler
(I) Free Trade Helps Development of ' ': would result In exposure of domestic pr;d:d0Ptio11
t10
of the principle of Ire~ trade by na :ould ba required t~ face without any direct or ~ers lo
1
international competition which t~eylly this exposure to international co~petilion wou,i ireq
supporfTromthe gover~~ent. Na ~titiveness, efficiency, obsess)on for exceiiehe1p
development of q~~~it,es Ilk~ cs ty~es of industrial skilis and organisational and rnana nc.8,
inventiv~ness,.acqu1s1t1on of_va~t lities in the modern world and time, if a country9_ eria1
abiliffes. These are all aesira __e qua Id of the present times. isto
succeed in this highly competrtive wor

8.3 ARGUMENTS OR CASE AGAINST FREE TRADE

. . t be practically abandoned after the Great Depression (1929.33 )
The pohcy of free trade came o . f II . re the important ones· . ,
both on theoretical and practical grounds of which th e O owrng a ·

(1) · Th e various
• advan tages of free trade were claimed
. .on the basis ofa number
· f · of
· assumptions
such as perfect mobility of factors of production w1th1n a country, wor~!~iL~. prrc.e_mec~~nism
~·;;.:n•s--ofpenect competition and so on. But these assumptions proved to be
un der con dm1u ~· •t· b t · f t th
mostly invalid. Not only·tnere·aia'not exisrp·e·rte'c;l compet1 ,on u 1n ac ere emerged
monopolies and oligop~)ies.
Under such circumstances benefits claimed from adoption of the principle of free trade or
policy just could not be enjoyed. Advantage~ claimed on beh~lf of free trade proved to be only
theoretical advantages with very little practical use or benef1t.
(2) · It came to be observed that under !_ti~ Ifill!!!WgJfree trade, countri~s came to specialise only
-: in some industries, negleQ!ing.development Qf $9m~ oth~r if1QlJ~@~$..Or. segors of •the economy.
-.. _ · . Th1is Yredominantly agricultural countries remained qnlY, ago2~1t~r_al countries as they were
-- supposed to specialise only in that sector because of abundance of land and labour. Also, on
the basis•of:irite'rnational division of labour or speciali~ation, some countries specialised only
in some i~dustries and neglected s..C?.'!!~. oth~r industr!~s,_dep~nding upon th ~ PT ~ip~ of
co,mp~r~t~v~ ??~!,,.?.f!v.?ntage. Naturally, free tra~e resulted in lop-sided develop~ of
ecorrom1es of many countries, especially in the 1gi •c·entury: For 8),Carffple; l'ridia become
h

... ri mainly an agricultu~al country supplying industrialTaw materials like cotton, jute, iron ore,
, . _. i leatrer and other mtne~ats to England and h~d to go without those industries for which she
.. . ,ha~ eriough r~w materials. Such lop-sided economic development has many_un.oesirable
. SOCI0·:?~~~!!}~9-~n~_political as also cultural consequences such as dependence-~n ott'ler
counJ~1?s ~~~n_fpr v1_ !al g9od~; :absence of abilities needed to establi~~ ~n~.manage fargG•
s~al~ ~ d~~t_rre_~. cont1nua~ce oJ oJd and traditional value-system, absence of industrial cultur~
with rts a1sc1plrne, hard work, incentiveness and so on.
 nder the regime of free trade th •
, AS U · · ere was lais
(3, y restrictions on international mov sez faire policy and th . .
anmrnodities came to be imported b ements of goods amon ~-stat~ did no\ irnp9se

ha h rmtul -effects on the health and Welfare of the

1
cO d extremely harmful effects on th:h~n:i~~upulous merchants in n~~~ns, f many _Qarmf~I
. er o countries. This
such .a . . and welfare of the .community. In order to prevent
to step in and impose rest~rctlons on the import of h community, at some stage the State had
reasons why many countries came to give up free .8rmd ful c~mmodities. This was one of the
, ra e policy. •
1"he policy of tree trade also resulted in some 0 th
(4) countries
'" · ·1ar fac tor-endowments ·or witherbetter
wit· h-~1m1 undesirable
f consequences. For example,
throat compet1t1on to capture as large a portion f actor-endowments resorted to cut-
throat competition resulted in the adoption of(du~ ;arid marke! as possible. Often this cut-
tten below even the cost of production Once a P 9 of goods in forelgQ countries at prices
O · I · saconsequenceofth'1 d · '
potential or ac tua I nva s were driven out of their . d . s umping policy, the
goods would raise pric~s to ?:. very high level by '~k~~tnes, th e country previously dumping
make good the previous l<?sses on account of dumpin ~~~~antage ?f absenc.e of riy_aJ§~.?nd
b aumping in th~ first instance_·Japan for exam g ater re!a 1n t~e ma_rket C_.2Qg~e.sed
th
r:spect of textiles. Naturally, such adumping p~li~~ 's poh~y v,s-a-vis-,lndia•in
i number of industries if the affected country were to continue w·thavfe cot ntdrnued.to destroy a
v • 1· - It d . 1 ree ra e policy. Naturatry
suer: ~umping po rcy Jesu e_ m_a~andonment of the policy of free trade by the affected
co~ntnes. They resorted to h1g_h tariffs tQ Q_rot~ct their industries against du~ping.
(5) A~cording_ to Pr~f'~ -a~-~~~' the policy of free trade (which also means in effect the policy of
1mptions laissez '.~~re on ~fle pa~ ~f t~e s~ate) may leag_Jo the emergence of international as also
chanism nat_ional monopoltes. While tnternat!9_nal monopolies would hamper the development of domestic
~d to be indust~ies for which resources may be available-in the country,both types monopolies of
would definitely result in reduction of comm·uhity's welfare. -- - - - -- -
merged - --- - .
(6) Prof. Haberler's view that policy of free trade would help rapid economic development of
:rade or backward countries cannot be accepted. ·
be only Countries of Western Europe had an early start in the sphere of industrialisation and they
have accumul&"ied vast managerial and organisational skills and technical ability.and have
seonly developed infrastructµral facilities.Jg__builgJJQ..hig_hly d~y~!.9ped_inqy_striaj..§tru9t1m1,_i_g_ their
Jnomy. countries. It also needs to be noted that presently industrially advanced and developed countries
ywere have also highly developed agricultur_e. Under such circumstances, adoption of the policy of
1s0,on free trade would just not allow development of industries in developi~g countries, though they
id only may possess vast industrial potentialities. Thus, by taking advantage of their strong industrial
iple of position (and, therefore, also of vast military strength), Western countries built their empires
~ of in Asia and Africa in the 17th and 18th centuries~ The·po)icy of free trade that was forced on
come India by the British rulers came to reduce countries like lnd.ia to the position of supplier~ of
1 ore, industrial raw materials to Western highly industrialised countries. Even at pre_sent, taking
h sh8 advantage of their strong economic position, the developed countries ar~ ~akrng t~rms of
raole
-'.)ther trade more and more adverse against developing countries. No wonder, Indra .s share ,n world
;,;..,
1986 87
exports has declined from 1.05 per cent in 1960-61 to a mere 04.4 per cent m · ·
1rgt~ th
Under such circumstances it follows that developing countries like lnd i~ can develof ~:

-
11wr9
!ndustries, agriculture and' economy only by adopting a judicious policy of protec ,on
Industries.