What are the important advantages of Free Trade ?

The classical economists, like Adam Smith, Ricardo, etc., advocated the free trade policy as against the mercantilist system of protection. Various arguments can be given in favour of the free trade policy:

1. Trade According to Comparative Advantage Theory:

Under free trade, production and exchange take place in accordance with the theory of comparative advantage. The theory of comparative advantage has the following implications:

(i) Each trading country will tend to increase the output of that good in which it has comparative advantage and will tend to reduce the output of that good in which it has a comparative disadvantage.

(ii) Each country will export the good in which it has comparative advantage and import the other.

(iii) World output will increase and will become more efficient.

(iv) Each country will gain from free trade relative to autarky.

(v) The gains enjoyed by a country will be greater the more favourable its terms of trade, i.e., the greater the difference between relative prices before and after trade

2. Optimum allocation of Resources:

Free trade results in the optimum allocation of resources. It permits the reallocation of world resources in accordance with the principle of comparative advantage. Under free trade, every country specialises only in the production of those goods in which it has comparative advantage. This leads to proper and most efficient use of productive resources of the world. The resources are not wasted in producing those goods in which a country has comparative disadvantage and which it can import cheaply from other countries.

3. Maximisation of Output:

The theory of international trade has shown that the world output of goods and services can be maximised only under the conditions of free trade and international specialisation. International specialisation in accordance with the theory of comparative advantage leads to larger production and at lower costs in all the countries. In the words of Ingo Walter, “The world as a whole is certainly materially better off under free trade than with no trade at all and so is the individual nation,”

4. Optimisation of Consumption:

Free trade helps the trading countries to secure the optimisation of consumption. In the absence of international trade, a country’s domestic consumption is limited to its production possibilities. However, through international trade, the consumption possibilities of the country can expand beyond its production possibilities.