free trade

free trade

1. disadvantages

   • Free trade policy is based on the assumption of laissez-faire or government non-in­tervention. Its success also requires the pre-condition of perfect competition.
     • this however does not exist in the actual world
   • Free trade policy works smoothly if all the countries cooperate with each other and follow this policy. If some countries decide to gain more by imposing import restrictions, the system of free trade cannot work.
   • Free trade increases the economic dependence on other countries for certain essential products such as food, raw materials, etc. Such dependence proves harmful particularly during wartime.
   • Free trade leads to economic dependence and economic dependence leads to political slavery. For political freedom, economic independence is necessary. This requires abandonment of free trade
   • Free trade and the resultant international specialisation lead to unbalanced development of national economy. Under this system, only those sectors are developed in which the country has a comparative advantage. Other sectors remain undeveloped. This results in lop-sided development.
   • Free trade may lead to cutthroat competition and dumping. Under dumping, goods arc sold at very cheap rates and even below their cost of production in order to capture the foreign markets
   • • Under free trade, injurious and harmful products may be produced and traded. Trade restrictions are necessary to check the import of such products.
   • Free trade may lead to international monopolies. It encourages the estab­lishment of multinational corporations. These corporations tend to acquire monopoly position and thus harm the interest of the local people.
   • Free trade is harmful for the less developed countries for the following reasons:
     • (i) Competition under free trade is unfair and unhealthy. The less developed countries find it difficult to compete with the economically advanced countries.
       • (ii) Under free trade, gains of trade are unequally distributed depending upon the level of development of different countries. The terms of trade are favourable for the developed countries, and un­favourable for the poor countries.
         • (iii) Less developed countries generally experience unfavourable balance of payments. The problem of un-favourable balance of payments cannot be solved under free trade policy.
           • (iv) The less developed countries cannot protect their infant industries under the policy of free trade.

2. Advantages

   • The theory of comparative advantage This explains that by specialising in goods where countries have a lower opportunity cost, there can be an increase in economic welfare for all countries. Free trade enables countries to specialise in those goods where they have a comparative advantage
   • Increased Exports. As well as benefits for consumers importing goods, firms exporting goods where the UK has a comparative advantage will also see a big improvement in economic welfare. Lower tariffs on UK exports will enable a higher quantity of exports boosting UK jobs and economic growth.
   • Economies of Scale. If countries can specialise in certain goods they can benefit from economies of scale and lower average costs, this is especially true in industries with high fixed costs or that require high levels of investment. The benefits of economies of scale will ultimately lead to lower prices for consumers.
   • Increased Competition. With more trade domestic firms will face more competition from abroad therefore there will be more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from charging too high prices.
   • Trade is an engine of growth. World trade has increased by an average of 7% since the 1945, causing this to be one of the big contributors to economic growth
   • Middle Eastern counties such as Qatar are very rich in reserves of oil but without trade there would be not much benefit in having so much oil. Japan on the other hand has very few raw material without trade it would be very poor
   • Tariffs may encourage inefficiency If an economy protects its domestic industry by increasing tariffs industries may not have any incentives to cut costs.
   • Free trade increases access to higher-quality, lower-priced goods. Cheaper imports, particularly from countries such as China and Mexico, have eased inflationary pressure in the United States.1 Prices are held down by more than two percent for every one-percent share in the market by imports from low-income countries like China

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