"A policy of unrestricted international exchange of
goods is known as the policy of Free Trade".
Adam Smith like the Physocratics of
France, was a staunch advocate of free trade. He was of the view that state
should not interfere in the internal economic life of the citizens of a country
as it hampers economic progress. He was against putting any kind of restrictions
on the imports and exports of commodities. In the words of Adam Smith:
all why the protection in needed just to save the gold from going into the other
country. I do not give much importance to it. It is a kind of commodity which is
less important than other commodities because goods can serve many other
purposes besides purchasing money but money can serve many other purposes
besides purchasing goods. If protection is levied, it will divert industries
from more advantageous trade to less advantageous trade".
The other English
classical economists also believed in the doctrine of laissez-faire.
The policy of free trade has not been carried out completely by any country
of the world. Some degree of state regulations has always been there on the
international exchange of goods. England was the only country in the world which
had maintained free trade for a long period. It was mainly due to the fact that
it was more industrially advanced than the other countries and so it suited her
In the late nineteenth century, there was a reaction in
protection from U.S.A. and Germany and they set up the industries by erecting,
tariff walls. England abandoned her free trade policy during the Great
Depression of 1930's. In recent years, some attempts have been made to establish
free trade areas on regional basis.
In 1957, six countries of Europe comprising
France, Germany, Italy, Netherlands, Belgium, Luxembourg formed a European
Common Market. A second area of regional free trade is established by Great
Britain. Norway, Sweden, Denmark, Portugal, Australia and Switzerland and is
known as E.F.T.A.
Advantages of Free
The main advantages which are claimed
for free trade are as follows:
(1) If the policy of free trade is adopted by all the countries of the world,
it promotes a mutually profitable international division of labor which leads
lo specialization in the production of those commodities in which they have the
greatest relative advantage. The diversification of human and material resources
of the country into remunerative channels results in increasing the real
national product of all the countries. The standard of living of the people all
over the world goes up.
(2) Free trade is undoubtedly the best from the point of view of the
consumers, because they can get wider range of goods and commodities at lower
prices. When protection is levied, the choice is reduced and the prices of
commodities go up. The consumers then stand at a disadvantage.
(3) Free trade has the merit that it prevents the establishment of injurious
(4) Under free trade, the home producers try to put forth their best because
they are faced with foreign competition They quickly adopt the changes which are
made in the designs of the commodities or in methods of production.
(5) The factors of production are freely able to move from one place to
another or from one occupation to another occupation and thus are able to secure
high rewards for their services.
Disadvantages of Free
Disadvantages. The main arguments which are advanced against free trade are
(1) One of the most captivating argument put forth against free trade is that
it leads to over-dependence upon other countries. In time of war or any other
emergency, the over-specialized countries may not be able to supply the required
goods to the non-specialized ones.
(2) It is pointed out that under system of free trade, the economically
backward country remains always at a disadvantage with the economically advanced
country. So in order to build up industries, the backward nations must erect
tariff walls USA. and Germany in the late 19th century abandoned free trade,
because they were late in entering the industrial field. They developed the
industries behind tariff barriers. So is also the case with India.
(3) When trade is unrestricted, the import of injurious and harmful goods
cannot be hindered.
(4) Under free trade, if a country resorts to dumping with a view to capturing
foreign markets, the home industries cannot be protected.
(5) Another argument advanced against free trade is that international
specialization leads to an unbalanced economy of the country.
In the past, all the countries of the world have abandoned free trade and
have turned protectionist In the last few years, there is again, a reaction in
favor of free trade on regional basis. It has been experienced by the member of
the ECM that the reduction of tariffs has greatly increased their trade with one
another and the consumers have been able to get goods at cheaper prices.