"Free trade promotes a mutually profitable regional division of labour, greatly enhances the potential real
national product of all nations and makes possible higher standards of living all over the globe". Explain and critically examine the statement.
Free trade refers to trading across national boundaries without restrictions. This means that a country imposes any restrictions on importing goods and services from other countries, and at the same time it is able to export its products to other countries without facing any restrictions placed by them.
Free trade permits countries to manufacture and export to other countries the products they are able to make more efficiently and economically then them. In return the country imports other products which other countries are able to manufacture more efficiently and economically. For example, India export ready-made garments to USA and other countries as it can manufacture them more economically than USA can. At the same time India imports computer chips from USA which it cannot manufacture as economically as USA does. If instead import and export of this type, India tried to divert its resources used for making ready-made garments for export to making computer chips within the country, it will not be able to get the same quantity of computer chips manufactured within country. Thus the total goods and services available to Indians will be reduced by eliminating this type of export and import. Similarly USA and other countries importing ready-made garments tried to manufacturing ready-made garments within their respective countries instead of importing, total value of goods and services available to their people will also reduce.
Thus free trade tends to improve the well being and standard of living of all countries that engage in it. However there are some limitation on the logic about about countries exporting what they can make most efficiently and import what can't make or can make least efficiently.
The first of these limitations is the transportation and other transaction costs. import end export involves transportation of goods over longer distances across national boundaries. This adds to their costs. Also trading across national boundaries involves more time and efforts in selling and purchasing activities. this also adds to the cost. Thus the differences in manufacturing costs of different countries mus be large enough to cover these additional costs.
The we also need to consider the the impact of unutilized resources. For example, a country utilizing an old technology may have higher production cost for manufacturing a product, like say textiles, than another country using better technology. But, import from other countries will make the local textile manufacturing facilities redundant, which cannot be used for any other purposes. Also it may render many people employed in that industry job less. Thus the import of textile will not result in any significant rise in production of other products, and thus total prosperity of the country will come down.
Sometimes, import from other countries can inhibit growth of local industries. A country that is inefficient now need not remain inefficient. It develop and improve its capabilities and improve its prosperity over a period. However, free trade may inhibit such growth and development of local industries.
Thus free trade definitely can contribute to improvement in general standards of living, however totally uncontrolled free trade is also likely to hurt the interest of countries practicing it.