The Merits Of Free Trade

1006 Words5 Pages
Douglas A. Irwin, "A Brief History of International Trade Policy." November 26, 2001. Library of Economics and Liberty. This essay discusses the merits of free trade. Why did Adam Smith believe government restrictions on trade were harmful? What about the negative effects of free trade on certain sectors or groups - is free trade still a good idea? With his observation that economic growth depends upon division of labor and specialization, Adam Smith revolutionized economic understanding. Whereas supporters of Mercantilism were in favor of an interventionist policy by supporting exportation of domestically produced goods and reducing the importation of foreign goods, Smith argued against market restrictions. Instead, countries should focus on division of labor and specialization within an open market. The bigger a market is the more specialization is possible. Hence, international trade would lead to an increase of market size; this would bring benefits to all countries by increasing the output and would lead to a higher standard of living. With this argumentation, the basis to fundamentally reconsidering the ideas of Mercantilism was provided. Just as a government uses restrictions to influence this system of free trade, Smith argued, the costs for this intervention exceed the savings that are thereby gained. A policy that supports domestic exporting companies with subsidies enables them to offer their goods on foreign markets to a reduced price. The result of this policy would always “force the trade of a country into a channel much less advantageous than that in which it would naturally run of its own accord”. When government restricts the importation of foreign goods, it enables companies on the domestic market to yield higher margins, as they are on a less competitive market and thereby in the position of a monopolist. With this, Smith unmasked the
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