The policy of free trade is generally adopted by the countries for the free flow of resources between the countries larger production, specialization and division of labor and to follow a non-discriminatory policy against other nations of the world.The strong supporters of the free trade policy have advanced the following arguments in favour of free trade policy.
1. Exploiting the Advantage of Division of Labor and Specialization. Free trade policy helps in utilizing the national resources in the best interest of the country. The real income of the participating countries goes up because the countries concentrate on production of only such commodities which are best suited to them considering the relative cost advantages. It means different industries will be concentrated in different countries on the principle of specialization and division of labor. This phenomenon of specialization and geographical division of labor will benefit all the countries of the world. The country will export the goods in which it obtains the specialization and imports other commodities which are available at cheaper prices from other countries because producing countries have specialization in their production.
2. Reduction in the Cost of Production. Specialization and division of labor lead to fall in the cost of production. It helps in reducing or bringing down the prices of the commodities all over the world because cheaper goods shall be imported and exchanged for indigenous goods. Free exchange of technology not only increases the production, but also reduces the cost of production.
3. Check on Monopoly. Since the home industries have to face competition with theirs foreign rivals, they cannot set up any monopolistic combinations to exploit the consumers in order to maximize their profits. It thus safeguards the consumer’s interest against monopolistic competition.
4. Extensive Markets. Under free trade policy, the producers can sell their products even in the distant markets of the world without any restrictions. Thus, the markets of different commodities tend to become wider and more, extensive under the policy of free trade. Large scale production economies can be obtained due to extensive markets.
5. Benefits to the Consumers. Under free trade policy, consumer class is the most benefited section of the society because of the following reasons—(i) existence of competition between the indigenous and foreign industrialists, the prices of various commodities are the least possible, and, (ii) The quality of the commodities available in the market is also better otherwise the seller will soon be out of the market.
6. Optimum Utilization of World Resources. Every country is endowed with certain special facilities in the form of natural resources, human resources capital and equipment etc. Free trade helps the free movement of goods and raw materials between the countries and therefore, ensures their equitable distribution of these resources all over the world. Each country is free to import raw materials and furnished goods at a cheapest price from any countries in the world and sell its own products in any market where they can fetch maximum price. Thus, under free trade policy every country enjoys unrestricted freedom as buyer as well as seller. It leads to optimum utilization of world resources.
6. Restoring Balance of Payment Equilibrium. A country suffering from unfavorable balance of payments situation can restore the equilibrium by exporting more goods and raw materials to foreign countries whereas maintaining balance of payments is sometimes not possible under restrictive trade policy and some countries can never restore balance of payments equilibrium.
7. Improvements in Productive Techniques. Since the home producers have to face foreign competition, they are forced to improve the productive techniques in order to bring down the costs of production and to improve the quality of their products.