Recent arguments on free trade policy:

A few decades back, the comparative performances  of  the Latin American and East Asian economies showed that the latter had not only outpaced their Latin American counterparts but had  also been able to withstand external shocks while maintaining  their growth performances over a considerable span of  time. With  limits of domestic markets emerging as impediments to growth in the East Asia and Latin America, the experiences  of these countries were used to argue that  import-substituting policies had  failed and should be replaced by export-promotion which was supposed to achieve faster growth than import substituting  strategy.

It was argued  that the import-substituting  regimes of the developing countries had resulted in low growth equilibrium, characterised by inefficient allocation of resources, artificial rents and parallel markets. It was also suggested  that in the absence of global competition, protected domestic enterprises were com- promising on efficiency concerns that resulted in availability of poor quality goods at unduly higher prices. Absence of the pressures of competition was also  making these protected  enterprises as  less-enterprising and  less- innovative. Thus, there was a need  to aim at economic openness and  in this context  trade openness was considered as a  tool for bringing economic development  through export-led growth  and  consequent  employment generation.  

For developing countries, globalisation offers access to foreign capital, global export  markets, and  advanced  technology while breaking the monopoly of inefficient and protected domestic producers. Faster growth, in turn, promotes poverty reduction,  democratisation,  and higher labour and environmental standards.

These  arguments  and global developments  generally have strengthened  the case for an open  trading system.  It is held that the historical  record is very clear  that free trade bestows many benefits. Those countries  that lower  trade barriers and open their markets enjoy higher economic standards of  living. Consumers have access to a wider range of higher quality products at prices lower than they would otherwise  pay if  they were forced  to buy them from domestic producers. The  average  person also benefits  in  terms ofwages  and job opportunities. When labour and capital flow freely to the most productive areas of the economy, workers are employed in better, higher quality jobs with higher wages. While there are inevitable  short-term transition costs in some sectors of the economy, the long-term benefits of free trade for all far outweigh such costs.

Thus,  as you have seen in earlier section, proponents of free trade suggest several  sources of gains from  trade.  First, as the market potentially  served by firms expands from a national to a world market, there are gains associated with declining  per unit production costs (economies of scale).  Asecond  source of gains results from the reduction in the monopoly power- of domestic firms.

Domestic firms, facing more pressure from foreign competitors, are forced to produce the output demanded by cdnsumers at the lowest possible cost. Third is  the gain to consumers from increased product variety and  lower prices. Generally speaking, the gains from trade result from the increase in competi- tive pressures as the domestic economy  becomes less insulated  from  the world economy. Fourth, when trade barriers are reduced, exports increase and they provide additional avenues for employment and scope for poverty-reduction. Fifth,  there is the classical argument from the time of Smith and Ricardo regarding efficient allocation of resources. Moreover, it has also been argued that protection to industries  is not costless. For instance, it requires resources from other  industries; hence, output in other domestic industries is reduced. Industries might also be less efficient and
uncompetitive due to higher cost of imported inputs used in their production on account of high import tariffs. Since protected industries  tend to produce at higher cost, consumers are subjected to high-priced products. Not  only that they  lose  due  to  lesser  consumption of costly protected goods but  also consume less of other goods whose prices rise due to their lower production.

It was against  this backdrop that the Uruguay Round of  the GATT negotiations gained momentum and a new World Trade Organisation came into being in 1995.  It envisaged laying down the foundations of a freer  trade regime at the multilateral level with the commitment from its members to  liberalise trade and other trade-related economic activities. The  free trade proponents made different  estimates  of  gains  from  multilateral liberalisation. As per one estimate,  under  the WTO, a complete dismantling of existing  tariffs on  imports worldwide could increase world economic output by approximately  3  per cent. In monetary terms, that amounted  to the equivalent of US$1.2 trillion boost to the world economy. It was further argued that the developing countries would gain the most.

Despite this,  many of these countries still place protective andor revenue tariffs on foreign products to protect some favoured or politically influential industries, or to  reduce the  taxation demands on their internal domestic manufacturing, making their products more competitive. The elimination of these tariffs remains a contentious political and diplomatic issue. China and Japan have been accused of protectionist policies that peg their currencies  to the dollar and, thus, set ptices of their exports lower than they would be if the market determined the relative prices of each currency. However, the theoretical arguments and the empirical estimates have been contested  by those who do not consider free trade as welfare-inducing. Critics argue  that the very proponents of free trade actually practise protectionist policies.