Naturally countries hold different resource endowments and efficiencies of production. Some nations will have labour forces more skilled in certain sectors then other countries and thus will hold better efficiencies in production in those sectors. Others may have large resource endowments; and hence the need for nations to trade in order to increase their peoples standard of living. The theory of free becomes based on the principal of comparative advantage. Nations will specialize in the production of goods and services in which they can produce with a lower opportunity cost compared to other nations. The nation should export it's surpluses of the goods and services which it has comparative advantage in, and it should import the goods and services in which it has a comparative disadvantage. Free trade results in promoting economic efficiency and growth, increasing the supply of good whilst reducing their costs. Specialisation inspires greater productivity, resulting in an increase in real income and standards of living.
The Free Trade Hall
Punch cartoon (1906); Free Trade triumphs over Pro...
Punch cartoon, 1930: The character on the right re...Many trade barriers exist such as tariffs, quotas and subsidies and result in inefficient allocation of resources, and consequently a reduction in economic welfare. Protectionist measures evoke an increase in prices for imports, reducing the standard of living for the domestic consumer. The main focus of the protection is to shift the demand from overseas producers to domestic producers by making the domestic product more 'attractive'. A tariff for example is a tax placed on an import, resulting in an increase of price passed on to the consumer. This price increase then makes the domestic product more attractive to the consumer, although the consumer now pays more for the same quantity of product.
Therefore economists believe that there is strong reason to reduce trade barriers. Protection always favours particular industries, in many ways representing a misuse of government funds and...