Gains from free trade and welfare:
We analysed the different implications of traditional theories of trade and also several theoretical departures from them. From the concept of absolute advantage to comparative advantage and thereafter the concepts of factor endowments and factor intensities helped us to understand the gains fiom trade and the determinants of trade. But the real world intcrnational trade patterns and features posed analytical challenges in as much as the traditional theories were unable to explain a large part of global trade. The alternative explanations came forth in a quest to identi@ the determining factors of trade that were better approximations of reality.
Such theoretical departures also influenced the policy-practice at both the national and global levels. When fiee trade theories could not hold the test of tirpe due to shingent assumptions like perfect competition, arguments in favour of protection were advanced. It had a developmental angle but on occasions it also justified unfair trading practices. Countries practiced the policy of import-substitution and import protection especially in the developing world. But later it was observed that while this had a beneficial effect on building a manufacturing and economic base in these countries, it also generated undue economic rents and made them 'high-cost poor quality' economies. As a response to correct these anomalies and some success of East Asian economies, an open trade or a freer trade policy was advocated.
Classical economic analysis shows that free trade increases the global level of output because free trade permits specialisation among countries. Specialisation allows nations to devote their scarce resources to the production of the particular goods and services for which that nation has a comparative advantage. The benefits of specialisation, coupled with economies of scale, increase the global production possibility frontier. An increase in the global production possibility frontier indicates that the absolute quantity of goods and services produced is highest under free trade. Not only are the absolute quantity of goods and services higher, but the particular combination of goods and services actually produced will yield the highest possible utility to global consumers.
Free trade policies are often associated with general laissezrfaire economic policies, which permit faster growth. Laissez-faire policies-the absence of government intervention in trade, entrepreneurship and investment-is often positively correlated with high per capita'income. Voluntary exchange, by virtue of its voluntary nature, is beneficial to the parties involved. Thus, the restriction on voluntary exchange, restricts commerce and ultimately the accumulation of wealth. Thus, countries switched over to the Nlicies of export-promotion and import liberalisation from policies of imporlcsubstitution. Such a move also made the arguments for having a freer trade re~nne at the multilateral level as well. While the multilateral negotiations of tk Uruguay Round to establish WTO was in progress, in parallel the predilections of the new trade theory and the strategic trade theory in favour of infant industry protection or protection to strategic industries through government's role was also gaining momentum.
Trade distortionary policies were advocated in response to imperfect markets and existence of restrictive business practices, the unfair trade practices. The present era is nothing but a reflection of coexistence of both theory and practice of free trade doctrine on one hand and government's support to sectors on the other. Both trade liberalisation and protection find their ways in the policy-domains all over the world.