Free trade and specialisation beneficial to countries and it should be encouraged in all circumstances. Discuss.

Free trade and specialisation beneficial to countries and it should be encouraged in all circumstances. Discuss. [25]

Introduction

Provide a stand to the question.

Free trade and specialisation would enable countries to produce more goods and services in general and countries would likely benefit from trade and specialisation. Therefore, it should be encouraged in general, but perhaps not in all circumstances.

How free trade and specialisation is beneficial to countries

1. Explain and illustrate theory of comparative advantage

·      Illustrate, using a numerical example, how countries can benefit from free trade and specialisation. (Adapt standard numerical example showing trade between 2 countries and Theory of Comparative Advantage)

2. State limitations / assumptions of the theory of CA

·      It should be noted though, that the gains from trade and specialisation as mentioned above, excludes costs for transportation of goods between countries. Therefore the gains may not be as much as it should be.

‘Free trade and specialisation’ should be encouraged in general, but not in all circumstances

·       Although free trade and specialisation allow for greater consumption of goods and services, countries sometimes practise protectionism.

Figure 45: Effect of tariffs

Protectionism is defined as the deliberate erection of artificial barriers to trade with the intent of sheltering domestic firms from foreign competition.

·       Protectionism policies erodes away benefits associated with free trade (illustrate with examples e.g. import tariffs) (Figure 45)

Free trade may not encouraged

1. Infant industry

2. Protecting home employment

3. Preventing predatory dumping

4. Strategic industries

Free trade should be encouraged

1. Increased trade volume (export income)

2. Greater variety of goods and services

3. Economies of scale

Conclusion

Overall, the Theory of Comparative Advantage provides a strong justification for free trade, especially in an increasingly globalised world. However, depending on the domestic situations, it may or may not be encouraged all the time, and protectionism may be implemented in certain sectors of the economy for the above-mentioned reasons. It is imperative for a government to conduct a Cost-Benefit analysis before implementing any form of protectionism as it would have to consider the long-term implications and reactions from other countries.