SSC
A trade policy that does not restrict imports or exports through tariffs or quotas is called:
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Answer: Option D — Free trade
Detailed Solution
Free trade is a policy in which governments do not impose barriers, such as tariffs (taxes on imports), quotas (limits on the quantity of imports), subsidies to exporters or import licences, on the international exchange of goods and services. Under free trade, goods and services move between countries according to demand and supply, and countries specialise in producing what they can produce most efficiently.
The theory behind free trade comes from classical economists. Adam Smith, in "The Wealth of Nations" (1776), argued that trade based on absolute advantage benefits all countries. David Ricardo developed the theory of comparative advantage in 1817, showing that even if one country is better at producing everything, both countries gain from trade if each specialises in what it produces at a relatively lower cost.
Free trade is promoted internationally by the World Trade Organization (WTO), set up on 1 January 1995 to replace the General Agreement on Tariffs and Trade (GATT, 1947). India is a founding member of both. Countries also sign Free Trade Agreements (FTAs) with each other to reduce or remove tariffs. India has signed FTAs and similar agreements with Sri Lanka, ASEAN, Japan, South Korea, the UAE (CEPA, 2022), Australia (ECTA, 2022), the EFTA countries (TEPA, 2024) and the United Kingdom (CETA, 2025).
Arguments against complete free trade include the need to protect infant industries, jobs, national security and domestic farmers. India followed a policy of import substitution and protectionism from the 1950s to 1991, with high tariffs and licences. After the 1991 reforms, India reduced tariffs and moved towards freer trade.
Why not the other options?
- ✗Protectionism uses tariffs and quotas to protect domestic industries from foreign competition.
- ✗Mercantilism was a 16th-18th century policy of maximising exports and accumulating gold.
- ✗Import substitution means producing at home goods that were earlier imported, often behind trade barriers.
Quick tip
Remember: Free trade = no tariffs or quotas; comparative advantage = David Ricardo (1817); WTO = 1 January 1995 (replaced GATT). India-UK trade agreement = 2025.
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Economic Reforms & Foreign Trade — Preparation
This question tests your understanding of Economic Reforms & Foreign Trade, a key topic in the General Knowledge section. The detailed solution above uses a step-by-step approach to show the reasoning, and where available, a shortcut that helps you solve similar questions in under 90 seconds during the actual exam.
This topic covers the 1991 economic reforms (liberalisation, privatisation and globalisation), industrial policies, foreign trade and India's main trading partners, balance of payments, current and capital accounts, exchange rates, FDI and FPI, and foreign trade policy. Common questions ask what LPG stands for, what the current account includes, the difference between FDI and FPI, and what devaluation of the rupee means. The 1991 reforms were introduced by the government of P. V. Narasimha Rao, with Manmohan Singh as Finance Minister. Practise the economic reforms and foreign trade questions below, written in the style of the general awareness sections of exams such as SSC, banking, railways, CUET GAT, MAH CET and CLAT. Each question comes with a detailed explanation that adds related facts, so every question helps you revise more than one point.