1. TRADE POLICIES: Free trade vs. protection
Introduction:
The commercial policy to be followed by a country with regard to its foreign trade
has been the subject of heated controversy centering on whether a country should
follow a policy of free trade or protection. A number of arguments have been
advanced for and against both the policies. We shall briefly discuss them in the
following sections.
Types of trade policies:
1. Free trade policy
2. Protectionist trade policy
Free Trade Policy
Policy of non-intervention by government in foreign trade is referred to as “Free
trade”. Free trade policy implies absence of any artificial restrictions on or obstacle
to the freedom of trade of a country with other nations.
According to Adam Smith, The term “free trade” is used to denote “that system
of commercial policy which draws no distinction between domestic and foreign
commodities and, therefore, neither imposes additional burdens on the latter, nor
grants any special favor to the former”. In other words, free trade implies complete
freedom of international exchange. Under such a policy there are no barriers to the
movement of goods among countries and exchange can take its perfectly natural
course.
Classical economists like Adam Smith, Ricardo and others pleaded for
free trade for the welfare of the world.
ADVANTAGES OF FREE TRADE POLICY
1. Comparative cost advantage: Free trade is the natural outcome of the
comparative costs advantage. It permits an allocation of resources, and

2. manpower in accordance with the principle of comparative advantage, which
is just an extension of the principle of division of labour.
„‟the fact of free trade establishes an overwhelming presumption that the
commodities obtained from abroad in exchange for export are so obtained at
lower cost than which the domestic production of their equivalents would
entail. If this were not the case, they would not be imported, even under free
trade‟‟ says Jacob Viner
It has been maintained that the gain from free international trade would be the
largest due to international specification based on comparative advantage. Free
trade leads to the most efficient conduct of economic affairs. In a plea for free
trade, they also said that even if some countries do not follow the policy of free
trade, an industrial country should follow it unilaterally and it will gain thereby.
2. More factor earnings: Under free trade, factors of production will also 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. Cheaper imports: Free trade procures import as cheap rates. It seems to be
an attractive argument in favor of trade at least from the consumer‟s point of
view. However, it ignores the question of employment and the interests of
producers in the importing country. Here it has been pointed out that under
free trade, when consumers gain through lower prices; producers also gain
as the factors of production are directed to more gainful and specialized
production which gives better earnings.
4. Enlarged markets: free trade widens the size of the market as a result of
which greater specification and a more complex division of labour become
possible. Thus brings about optimum production with costs reduced
everywhere, benefiting the world as a whole.
5. Competition: Free trade policy encourages competition from abroad which
induces domestic producers to become more alert and improve their
efficiency.
6. Restricted exploitation: free trade prevents growth of domestic monopolies
and consumers‟ exploitation due to competition from abroad.
7. Greater welfare: Free trade permits large varieties of consumption goods
and improves consumers‟ welfare.

3. Thus free trade is the best commercial policy.
DISADVANTAGES OF FREE TRADE POLICY
1. Unrealistic Policy:
Free trade policy is based on the assumption of laissez-faire or government non-in-
tervention. Its success also requires the pre-condition of perfect competition.
However, such conditions are unrealistic and do not exist in the actual world.
2. Non-Cooperation of Countries:
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.
3. Unbalanced Development:
Free trade and the resultant international specialization 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.
4. Dumping:
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.
5. Competition: competition induced under free trade is unfair or unhealthy.
Backward countries cannot compete with advanced countries.
6. Unequal distribution: gains of trade are not equally distributed under free trade
due to unequal state of development of different countries.
PROTECTIONIST TRADE POLICY
Protectionism is the economic policy of restraining trade between states through
methods such as tariffs imported goods, restrictive quotas, and a variety of other

4. government regulations designed to allow (according to proponents) "fair
competition" between imports and goods and services produced domestically.[1]
This policy contrasts with free trade, where government barriers to trade are kept
to a minimum. In recent years, it has become closely aligned with anti-
globalization. The term is mostly used in the context of economics,
where protectionism refers to policies or doctrines which protect businesses and
workers within a country by restricting or regulating trade with foreign nations.[2]
Trade barriers:
1.Tariffs - taxes levied basically on imported goods. They are imposed as an
attempt to raise foreign exchange revenue and increase the welfare at the
expense of other nations.
2.Non tariff barriers -
Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are
not in the usual form of a tariff. Some common examples of NTB's are anti-
dumping measures and countervailing duties, which, although they are called "non-
tariff" barriers, have the effect of tariffs once they are enacted.
Their use has risen sharply after the WTO rules led to a very significant reduction
in tariff use. Some non-tariff trade barriers are expressly permitted in very limited
circumstances, when they are deemed necessary to protect health, safety, or
sanitation, or to protect depletable natural resources. In other forms, they are
criticized as a means to evade free trade rules such as those of the World Trade
Organization (WTO), the European Union (EU), or North American Free Trade
Agreement (NAFTA) that restrict the use of tariffs.
Some of non-tariff barriers are not directly related to foreign economic regulations,
but nevertheless they have a significant impact on foreign-economic activity and
foreign trade between countries.
Trade between countries is referred to trade in goods, services and factors of
production. Non-tariff barriers to trade include import quotas, special licenses,
unreasonable standards for the quality of goods, bureaucratic delays at customs,
export restrictions, limiting the activities of state trading, export
subsidies, countervailing duties, technical barriers to trade, sanitary and phyto-
sanitary measures, rules of origin, etc. Sometimes in this list they include
macroeconomic measures affecting trade.

5. FREE TRADE vs. PROTECTION
Freee trade:
A trade policy of placing no restrictions on the movement of goods between countries is known as the
policy of 'Free Trade.' Such a policy permits the flow of international commerce in its natural
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. Because of
natural and other facilities, each country is suited for the production of some particular commodities
environment, free of artificial impediments.
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 an attractive argument in favor of free trade at
least from the consumer's point of view. However, it ignores the question of employment and the interests
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 specialized 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.
VS.
Protection :
Protection refers to the foreign trade policy of encouraging home industries by paying bounties (or
giving subsidies) to domestic producers, or more usually by imposing customs duties on foreign
products.
The term protection usually carries in a very loose sense the connotation of a tariff on imports; but it
may refer to any policy that raises the price of import substitutes and safeguards the interest of
domestic producers against foreign competition.
Tariff system, i.e., customs duties, is an important and most common method of protection. By tariff
barriers we mean only those taxes which are intended to restrict international trade.

6. Protection is an established creed of modern trade policy. Yet it remains to be examined whether,
protection is a healthy policy leading to an economic millennium or a policy abounding in hidden
dangers.