Free Trade VS Protection – Intro
Free Trade and Protection comes under the commercial policy.
The commercial policy is related to whether a country should adopt the policy of free trade or of protection. If the policy of protection of domestic industries is adopted, then the question arises whether protection should be granted through imposing tariffs on imports or through the fixation of quota or through licensing of imports.
Adam Smith advocated for free trade and recommended that tariffs should be removed to get the advantages of free trade.
David Ricardo also defended free trade to promote efficiency and productivity in the economy.
Adam Smith and other earlier economists thought that it pays a country to specialize in the production of those goods it can produce more cheaply than any other country and import those goods it can obtain at less cost than it would cost to produce them at home. It means they should specialize according to absolute cost advantage.
Ricardo put forward a theory ‘Theory of Comparative Cost‘ in which he stated, that to obtain benefits from trade it is not necessary that countries should produce those goods for which their absolute cost of production is the lowest. He proved that it could pay a country to import a good even through it could produce that good at a lower cost, if its cost is relatively lower in the production of some other good.
Ricardo’s theory of trade is based on the idea of relative efficiency or comparative cost.