Trade without Government interference is known as Free Trade. In case of free trade, there is no duty on import & export and there is no quantitative restriction. In real world, there is hardly any example of any country following free trade policy. All the countries, in order to protect their own indigenous industries try to restrict imports.
World Trade Organization has been trying to decrease trade restrictions so that all the consumers can benefit by buying from most efficient producer. It should not matter whether producer belongs to the same country as the consumer or not.
Restriction of trade always leads to protection of inefficient indigenous firms, which decreases the welfare of the consumer. Since Dunkel proposal, there is unanimity among all the countries to decrease and put restriction on trade.
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Merits:
(i) Increases consumer welfare:
Consumer will get best quality product at lowest price from company which is most competent to deliver maximum value to the consumer. Consumer will not be required to pay high price to indigenous producer, which is the case in protective regime.
(ii) Increase world output:
As a result of free trade, each country will specialize in products which it can manufacture efficiently. All the countries will now produce goods in which they are most efficient and a country will import goods in which domestic sector doesn’t have competency.
(iii) Increases Competition:
Free trade will encourage domestic sectors to compete with globally best companies. Domestic companies will have to benchmark their activities against the best in the world. This will reduce the possibility of earning monopoly profit. Benefits of new innovation or introduction of new products will immediately be passed on to the consumers.
(iv) Companies will be able to generate economies of scale:
Company of a country which is best in producing a particular product will try to sell it all over the world. Thus, it can reap the benefit of economies of scale, which otherwise it will not be able to take advantage if it is selling only in domestic market. Benefits of economies of scale can ultimately be transferred to consumer by reducing the price of a product.
(v) Optimum utilization of world’s productive resources:
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Free Trade will lead to international division of labour and most efficient use of productive resources of the world.
(vi) Change the mindset of people of LDCs:
Entry of Multi-National Companies will lead to modernization in Less Developed Countries. The mindset of the people will change and they will develop interest in rationalist attitude and belief in science & technology. Communal and regional ideology will take a back-seat.