FREE TRADE AND

TRADE POLICY

Group’s members :
- KOUADIO MARC
- KOUI LAURIANE
- VIDJANAGNI Lecturer : Dr MOHSEN
NAOMI
 SUMMARY

INTRODUCTION

I- DEFINITIONS OF ECONOMICS TERMS

1 - Free trade
2 - Trade policy

II- FREE TRADE

1- Theories
2- Operation
3- Examples of free trade agreements

III- TRADE POLICY

IV- ADVANTAGES AND DISDAVANTAGES OF FREE TRADE

AND TRADE POLICY

V- WINNERS AND LOSERS OF FREE TRADE

CONCLUSION
INTRODUCTION

Nowadays, we are completely in the era of globalization. It is a phenomenon of creating links or

an interconnection between countries or places all around the world. One of the benefits or what
it implies is international trade. It means that people can or are able to make exchanges or goods
and services all around the world. It includes at least two countries and can include more countries.
However, as it is easy to say, practice it can also be a challenge for countries who actually need a
lot of things to develop themselves and be involved in international trade and benefit from it. That
is the reason free trade is present. However, it can also be a harm for other countries. That is also
why we have trade policy. Let us then discover then what free trade and trade policy are. First, we
will look at a clear definition of both terms. Then, we will consider what free trade implies and
how it can be applied. Then, we will also examine the same things with trade policy. After that,
shall we focus on the advantages and disadvantages of free trade and trade policy. Finally, we will
look at the winners and losers of free tree trade.
 I- DEFINITION OF ECONOMICS TERMS

1 - Free trade

Free trade is the unrestricted importing and exporting of goods and services between countries.

In the simplest of terms, free trade is the total absence of government policies restricting the import
and export of goods and services.

2 - Trade policy

Trade policy also called commercial policy or international trade policy refers to a nation’s formal
set of practices, laws, regulations, and agreements that govern international trade practices, or
imports and exports to foreign countries.

It refers to the agreements and regulations surrounding imports and exports between different
countries. It is used to promote economic growth and competitiveness.

For example: U.S. trade policy aims to strengthen the competitiveness of U.S. industries.12
 II- THE FREE TRADE THEORIES

Free trade is a largely theoretical policy under which governments impose absolutely no tariffs,
taxes, or duties on imports, or quotas on exports. Here, the objective is to make things easier; in
other words, facilitating trade.
1- Theories

- Mercantilism is the theory of maximizing revenue with the quantity of golds that a
country possesses, through exporting goods and services. The goal of mercantilism is a
favourable balance of trade, in which the value of the goods a country exports exceeds the
value of goods it imports. High tariffs on imported manufactured goods are a common
characteristic of mercantilist policy. Advocates argue that mercantilist policy helps
governments avoid trade deficits, in which expenditures for imports exceeds revenue from
exports. For example, the United States, due to its elimination of mercantilist policies over
time, has suffered a trade deficit since 1975.

- Comparative advantage is an economy ability to produce a particular good or service at

a lower opportunity cost than its trading partners. Comparative advantage is used to
explain why companies, countries, or individuals can benefit from international trade,
even though they do not have an absolute advantage. When used to describe international
trade, comparative advantage refers to the products that a country can produce more
cheaply or easily than other countries. While this usually illustrates the benefits of trade,
some contemporary economists now acknowledge that focusing only on comparative
advantages can result in exploitation and depletion of the country resources. The law of
comparative advantage is popularly attributed to English political economist David
Ricardo and his book On the Principles of Political Economy and Taxation written in
1817, although it is likely that Ricardo mentor, James Mill, originated the analysis.

- Absolute advantage is also an economic theory that states that a country need must
specialize in producing goods and services in which he has the highest productivity
compared to other countries. Adam Smith has established this theory.

2- Operation

The free trade theory works in a simple way, based on a principle that should be respected. As we
are on an economic level, we want to make trade easier for countries. Based on this principle,
countries will surely make agreements with some countries. According to those agreements, here
are some of the things they could do to facilitate trade, as it touches an economic dimension:
- Reduce tariffs to push foreigners to easily export their product here.
- Weaken other protectionist barriers.
- Facilitate movements citizens between countries included in the trade agreement.
- Make sure that everyone benefits more from the agreement than they can be harmed.
 3- Examples of free trade agreements
As examples of free trade agreement, we have different all around the world. We can mention:
• NAFTA: North American Free Trade Agreement. This agreement includes only countries
in North America, namely Canada, United States of America and Mexico.

• EFTA: European Free Trade Association. It includes Norway, Iceland, Switzerland,

Liechtenstein.
• SAFTA: South Asian Free Trade Agreement. The countries in this agreement are
Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
 III- TRADE POLICY

As countries trade with other countries, they must make sure that they will benefits. Moreover,
those benefits should be higher than the problem they might face with it as free trade is established.
Regarding this possibility, they will protect themselves. We talk about protectionism or trade
policy. It corresponds to the different laws or rules that countries set or established in order to
protect themselves and have control over trade or exchanges, in other words, imports and exports.
Countries have various possibilities concerning trade policy. Let us mention those ones:
• Tariffs
This strategy can be divided into two parts: taxes and duties. It generally consists in setting an
amount that the importer has to pay to government. This amount can be established according to
the preferences of the government. They can set a percentage that the importer will pay on the
complete amount he is spending on an import operation.
They can also decide to make the importer pay an amount depending on the unit of goods that are
being imported. This corresponds more to duties.
It is also possible to combine both elements by making categories according to which, there is an
amount or a percentage to pay on the amount of the operation.

• Quotas
It corresponds to restrictions or limits defined, based on the volume of a particular good, that is
being imported.

• Standardization
The Government of a country chooses a certain type or quality of product that can be imported in
their territory.
Most of time, countries use these policies for different reasons. As their name expresses it, it is to
protect themselves from international trade, which can present different disadvantages, harming
the economy of a country.
It means for example that it will motivate local producers to improve the quality of their products,
as the foreign ones are excellent and benefit customers.
Those foreign products might have a higher competition level compared to the ones of local
producers. If they easily come in another country, they could easily destroy the economy of a
country by increasing unemployment. This is possible because local producers will not sell enough
quantities, meaning that they will not have enough money. They will be pushed or obliged to fire
employees, increasing the level of unemployment in a country.
Furthermore, as it is not easy to come in another country, local industry can also develop, as
foreigners will with their devices and new technologies, as they cannot export. They will then
come to make their products and directly sell it.
IV- ADVANTAGES AND DISDAVANTAGES OF FREE TRADE AND
TRADE POLICY

❖ Free trade

➢ Advantages of Free Trade

- Increases foreign investment: the absence of trade restrictions encourages foreign

investors to put money into local businesses, which helps them to grow and compete.

- Encourages technology transfer: in fact, thanks to free trade, national companies can
not only receive human expertise, but also have access to the latest technologies
developed by their multinational partners.

➢ Disadvantages of Free Trade

- It encourages theft of intellectual property: without the protection of patent laws,

companies often have their innovations and new technologies stolen, forcing them to
compete with counterfeit products made in the country at lower prices.

- It reduces revenue: Due to the high level of competition stimulated by unrestricted

free trade, the companies involved ultimately suffer a reduction in revenue. The most
affected are small businesses in underdeveloped countries.

❖ Trade policy

➢ Advantage of trade policy:

- More opportunity for growth: Trade policy allows local industries to grow until they can
compete with more experienced firms in the international market.

- Decreased imports: Trade policies help reduce the level of imports and allow the country
to increase its trade balance.

- More jobs: Employment rates are higher when local firms increase their workforce.

- Higher GDP: Trade policies tend to boost the economy's GDP due to increased domestic
production.
➢ Disadvantages of trade policy:

- Stagnation of technological advances: Because domestic producers do not have to worry

about foreign competition, they have no incentive to innovate or devote resources to
research and development (R&D) of new products.

- Limited consumer choice: Consumers have access to fewer goods in the market due to
limitations on foreign goods.

- Higher prices (due to lack of competition): Consumers will have to pay more without
seeing any significant improvement in the product.
 V- WINNERS AND LOSERS OF FREE TRADE

- The "Winners"
Just as the cafeteria trade demonstrated, both buyers and sellers benefit from trading. With
international trade, the winners include consumers (buyers) and domestic companies that export
goods (sellers). First, let us discuss the benefits to buyers. Consumers see the benefits of trade in
terms of variety and price. International trade ensures that consumers have access to a larger
variety of goods and services. Think about some of the imported goods and brands that you buy
on a regular basis. If imports were not available, your options would be more limited than they are
now. In addition, many people buy imported goods and services when the prices of those imports
are lower than the prices of domestic goods and services. This often occurs when producers in
foreign countries can produce these goods and services at a lower cost than domestic producers.
These lower costs often translate into lower prices, which benefit consumers by stretching their
purchasing power. In addition, the competition provided by imported goods provides incentives
for domestic producers to keep improving the quality of their goods while keeping prices low.
Domestic sellers also benefit from trade. Domestic companies that export have the world as their
marketplace, not just the domestic economy. Producing for this larger market gives them the
opportunity to grow and produce on a larger scale. These economies of scale enable them to take
advantage of efficiencies and produce goods at a lower average cost. The lower production costs
help make the companies more competitive and can result in lower prices for consumers.
Benefits of trade extend beyond the immediate buyers and sellers. Countries that engage in
international trade benefit from economic growth and a rising standard of living. This occurs in
two ways. First, trade gives countries access to physical capital (technology, tools, and equipment)
that they might not produce domestically. This physical capital often results in increased
productivity, which is a key driver of economic growth and a rising standard of living within a
country.3 Second, access to global markets increases export opportunities for developing
economies. For example, China has become a manufacturing powerhouse4 and India has become
a leader in exporting services.5 both countries have experienced growth and development that
might not have happened without access to global markets. Economists suggest that trade provides
an avenue for the poorest nations to escape poverty. Recent research suggests that the removal of
trade barriers could close the income gap between rich and poor countries by 50 percent.6
We can regroup the Winners in these parts:
- Exporters with competitive advantage.
- Workers who gain jobs in export industries.
- Net economic welfare gain for society.
- Consumers who benefit from cheaper import Price,
- Domestics firms who see higher demand from consumers who now have more disposable income
due to benefit from cheaper imports.
- Consumers who see lower prices due to the competitive pressures of trade.
 - The "Losers"
At its core, international trade is similar to the cafeteria exchange—both buyers and sellers trade
because both benefit from the transactions. Third parties, however, need to be taken into account
because some are worse off from international trade. The most obvious third-party losers are
companies that sell products that cannot compete in a global marketplace. These companies must
find ways to make their products competitive or produce other products, or they risk going out of
business. When businesses shut down, people lose jobs. This is painful for workers because many
of them must learn new job skills to find new employment.

Net Benefits of Trade

Economists find that—after taking both the winners and losers into account—trade has net benefits
for society. In other words, the benefits outweigh the costs. This does not seem obvious to many
people because the costs are often more visible than the benefits. For example, it is relatively easy
to identify businesses or industries that have shut down because of trade. Likewise, it is relatively
easy to identify people who have lost jobs in those industries. Perhaps you know someone who
has lost a job in this way. However, it is more difficult for consumers to identify how much cheaper
their car, clothing, and food are because of international trade. In addition, the lower prices paid
by consumers and businesses mean they have more money to spend on other goods and services.
As a result, there are businesses that have experienced more growth because of that spending,
which would not have happened without trade. Again, those gains can be difficult to identify.

Policy Solutions
Those who suspect that trade might be hurting the economy sometimes propose "protectionist"
measures, which are policies designed to protect workers from foreign competition (see the boxed
insert). While these measures might save some jobs and industries, when trade volume is reduced,
so are the benefits of trade. Economists often suggest policies that preserve the benefits of trade
while addressing the costs, by compensating those who lose from trade. For example, many
economists suggest that international trade should be left largely unregulated but that government
should subsidize job-skills training programs for workers who have lost their jobs because of trade.
The Trade Adjustment Assistance Program administered by the U.S. Department of labour
operates on this idea.7 in this way, the benefits of trade are preserved, but policy addresses the
needs of those negatively affected by trade.

We can resume the losers in these parts:

- Domestic firms who are uncompetitive and lose out to cheaper imports.
- Workers who lose jobs in these uncompetitive industries.
- Particular regions, which see a concentrated decline in industries, which are now
uncompetitive.
- Social costs of new trade deals like tipp –e.g. alleged promotion of fossil fuels over
renewable energy.
 CONCLUSION
As we are in the end of this work, we understand that free trade and trade policy are two elements,
precisely, they oppose themselves. As free trade is using strategies to make international trade
between countries easier, trade policy is present to have a control and to protect countries from
being harmed by international trade. Different countries are using these rules to finally benefits or
maximize the benefits they could get from international trade.
WEBOGRAPHIE

I- https://www.thebalancemoney.com/free-trade-agreement-pros-
and-cons-3305845
https://www.thebalancemoney.com/what-is-trade-policy-
5217002

II- https://www.thoughtco.com/free-trade-definition-theories-
4571024
https://www.tutor2u.net/economics/reference/free-trade-
agreements

III- https://corporatefinanceinstitute.com/resources/economics/prote
ctionism/

IV- https://www.thebalancemoney.com/free-trade-agreement-pros-
and-cons-3305845
https://corporatefinanceinstitute.com/resources/economics/prote
ctionism/

V- https://www.economicshelp.org/blog/141607/economics/who-
are-the-winners-and-losers-from-free-trade/