What is Commercial Policy? Explain the concept of free trade and argument for and against it.
Government policy related to the international trade is called commercial policy. A country either uses free trade policy or protectionist policy. Free trade policy refers to the policy of non-intervention in the international trade. Exporters and importers are allowed to trade freely without any export duty or import tariff. Protectionism refers to the policy of protecting the local producers (from foreign competition) through the imposition of tariff. (which are taxes on the imports) or non-tax barriers (which are non-tax services to check the inflow of imports).
Non-tax barriers include fixation of quotas or making customs procedures deliberately complicated to keep imports under check.
Concept of Free Trade:
A trade policy which does not impose any barrier on the exchange of goods and services between different nations, is known as the free trade policy. The concept of free trade refers to a system of commercial policy which draws no distinction between domestic and foreign commodities and thus neither imposes additional burden on the latter nor grants any special favor to the former. Thus, free trade policy, permits international flow of goods and services without any artificial impediments.
Arguments Favoring Free Trade
Maximisation of output : Every country would specialise in the production of that commodity for which it is best suited or in the production of which it has comparatively greater advantage. This would result in maximisation of world output of goods and services.
Optimal utilization of resources: Service production is conducted on the principle of comparative cost advantage, resources are optimally used. Each country produces goods with least cost combination of input. It promotes competition and thus helps in the improvement of industrial techniques and methods of production. Thus, the overall efficiency of the production method improves.
As free trade/promotes competition, it helps in preventing the growth of monopolies. Thus, the chances of exploitation of the consumers are reduced. Service consumers are able to procure goods at cheap rates via free trade, such trade enhances their eval-fare. The Underdeveloped countries, according to Haberler, are abler to acquire different technical skills, managerial talents and entrepreneurial capabilities from the developed countries through free trade.
It tends to equalize the factor prices across countries. As a result, earnings of factors of production increase-This helps in raising the low level of wages in the UDCs.
Arguments against Free Trade:
This policy of free trade was abandoned after the Great Depression (1929-1933).
Free-trade psupposes the existence of laissex-faire and the working of the price mechanism under perfect competition. But, these conditions do not exist in the present day world. Monopoly, monopsony, cartels, imperfect labour markets and tariffs led the abandonment of free trade.
Nations with better factor endowments are able to produce certain commodities cheaper than others. This led to cut throat competition on the world markets under free trade. This policy led to the imposition of trade restrictions. It led to the emergence of international monopolies and local monopolies which according to Haberler, proved harmful to the other countries and the domestic interests.
Underdeveloped countries can develop better under a policy of protection rather than free trade. Under the policy of free trade, some industries possess comparative advantage but other industries are not developed. So, this leads to one-sided development of the economy.
Many harmful commodities came to be imported by unscrupulous merchants in a number of countries. This had extremely harmful effects on the health and the welfare of the country. Trade restrictions on the import of such commodities becomes necessary, thus this was the one of the reasons why many countries gave up free trade policy.