Question

Out of all the trade theories choose one trade theory that features the role of government and one trade theory that does not. Comparing the two trade theories, outline which theory best represents the advantages and disadvantages of completely free international trade. In your answer justify why you chose this theory. (broad question 350 words approx).

Answer 1

Free trade theory suggests the need of complete absence of government policies that could affect the exports and imports of goods and services of a nation. Even many economists suggests the need of pure free trade, the efforts were not much benefited to execute the idea. Only very less strategies and efforts could succeed in the case. The existence of protectionism in most of the countries stood against the idea of free trade which controlled the level of imports and exports by government thus reducing competition from other countries. In free trade, no government imposes tariffs, taxes or duties, quotas on imports or exports.

Mercantilism is considered as the oldest version of trade theory existed in the economy. The theory believed that a nation’s power and wealth is determined by the level of increased exports and thus increasing the involvement in the trade. Being gold the medium of transaction, the nation with highest amount of gold could be considered as the wealthiest. Since the government was able to intervene, nations tried to import less so as to maintain the stability for a wealthy nation. This led to export failure for many countries since they lack demand for their exports. Also, colonized countries were much exploited by charging high for their imports and paying very less for their exports.

Among the both, the free trade theory better represent the theory with no government intervention in international trade showing the advantages and disadvantages of the both. Advantages include the ability of the economy to increase competition, attract foreign companies to find a market, consume imported goods which are cheaper than the domestic production, to help domestic firms find markets in foreign countries are all advantages of the free trade theory. Increased competition can also help the economy to expand with increased size of market. It encourages the advancements and exchanges of technology.
The disadvantages of free trade theory includes the disability of domestic firms to compete with foreign ones, exploitation of labor since lack of governmental intervention, smaller economies to suffer from revenue reduction, destructing environment are all he disadvantages of the theory. Also, the lack of governmental intervention may deflect due to various reasons which can affect the economy.