8 Disadvantages of Free Trade in International Trade

January 16, 2019 admin 0 Comment

The case against free trade is further strengthened when we note the fact that economic growth is accompanied by changes in the stock, composition and allocation of productive resources of an economy.

3. Welfare Economics:

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We have seen above that left to itself, a free market mechanism does not ensure distributive justice. For that, a comprehensive policy (inclusive of a trade policy) has to be formulated.

4. Level Playing Field:

Irrespective of what may be claimed by the advocates of free trade, market mechanism is never non-discriminatory. It tends to favour some economies and some enterprises against others.

Economies of scale, product differentiation and other factors turn into an interplay of monopolistic forces and strengthen this phenomenon.

Consequently, the smaller enterprises run the risk of being wiped out. It is noteworthy that currently, we are passing through an era of corporate capitalism with increased odds against native entrepreneurs in developing countries like India (with heavy dependence upon cottage and small scale industries and suffering from scarcity of capital and infrastructure).

In contrast, the developed economies are in a better position to protect their industries even when they face genuine competition from labour-intensive products of developing countries.

They are also better able to dump their products below cost without much notice and/or opposition. As a result, unless the underdeveloped countries are able to defend themselves, they run the risk of remaining underdeveloped forever.

5. Reconstruction of Economies:

Developed countries have reached a stage of self-sustaining growth. In contrast, for reaching that stage, the developing countries have to depend upon large scale import of modern technology.

Factually, however, the seller firms of the developed countries try to export only outdated and obsolete technology to the developing countries.

This prevents the latter from offering quality products at competitive prices in international markets, and enables developed countries to get longer life- cycles from their outdated products (which are, nevertheless, still a novelty for developing countries).

6. Elasticity’s:

There is a general tendency for the exports of underdeveloped countries to have a high elasticity of demand and a low elasticity of supply.

In contrast, their imports tend to have a high elasticity of supply and a low elasticity of demand. Therefore, terms of trade tend to move against these countries, forcing them to adopt corrective measures through trade restrictions.

7. Financial System:

A developed and efficient financial system is a pre­requisite for the health and strength of a modern economy. However, financial systems of most developing countries are weak and inefficient.

By implication, they need additional safeguards for protecting themselves from disturbances originating in developed economies.

8. Trade Volume:

Developed countries trade far more between themselves than with developing ones. By implication, developing countries should devise measures to promote trade amongst them.


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