Why We Must Trade Freely

News: Economists view trade openness as one of the most critical elements in a country’s development policy.

Why India should review its trade protectionist policies?

The principle of comparative advantage: Freeing up trade moves a country towards specialization in products. This encourages the country to move towards products with low output costs and move away from comparatively costly products.

Benefits of economies of scale: Open Trade allows each country to specialize in a handful of products. In doing so, it allows each country to take advantage of scale economies and lower the costs of production of products it continues to produce.

Trade serves as a medium to access the most productive technology worldwide: For instance, the technology embodied in imported machines or imported products can be accessed by reverse engineering.

Exposes a country’s entrepreneurs to compete against the best in the world: Such intense competition keeps them competitive and offers an opportunity to learn from their peers.

Free trade benchmarks the economy against the best in the world: Exposure to the best in the world is an effective instrument of exposing domestic-policy distortions and poor infrastructure. It can help to identify the changes needed in its domestic policies, regulations, and infrastructure when the country is non-competitive.

Access to the global supply chain: Due to advances in transportation and communication technologies, and technological advances, product innovation, product design, and production and assembly can all take place in different locations based on cost advantage.

For example, a country that is rich in human capital is can focus on innovation and design, leaving manufacturing of components and assembly to countries that have a cost advantage in those activities.

Source: This post is based on the article “Why We Must Trade Freely” published in ToI on 18th November 2021.