FREE TRADE

WHAT IS FREE TRADE?

• Free trade is a largely theoretical policy under which governments impose

absolutely no tariffs, taxes or import duties on imports, or quotas on
exports.
• In this sense, free trade is the opposite of protectionism, a defensive trade
policy intended to eliminate the possibility of foreign competition.  
• The theoretical case for free trade is based on Adam Smith’s argument that
the division of labor among countries leads to specialization,
greater efficiency, and higher aggregate production. 
FREE TRADE AGREEMENTS (FTA)

• A free trade agreement is a pact between two or more nations to reduce

barriers to imports and exports among them. Under a free trade policy,
goods and services can be bought and sold across international borders with
little or no government tariffs, quotas, subsidies, or prohibitions to inhibit
their exchange.
• For example, the North American Free Trade Agreement (NAFTA),
between the United States, Canada, and Mexico is one of the best-known
FTAs.
The key terms of free trade agreements and free trade areas include:
• Import goods are products that were manufactured from a foreign land and
are brought into another country and consumed by its domestic residents.
• Export goods are the opposite of import goods – a manufacturer located in
one country sells its products to buyers in another country.
ADVANTAGES OF FREE TRADE
• International Specialization: Free trade causes international special­ization
as it enables the different countries to produce those goods in which they
have comparative advantage. International trade enables countries to obtain
the advantages of specialization. First, a great variety of products may be
obtained. If there were no international trade, many countries would have to
go without some products. Thus, Iceland would have no coal, Nepal no oil,
Spain no gold and Britain no tea. Second, specialization leads to an increase
in total production. 
• Benefits to Consumers: On account of free trade the consumers of the
different countries get the best quality foreign goods, often of a wider range
of choice, at low prices. 
• Safeguard against the Advent of Monopolies: Thirdly, if there were no
international competition, the home market would be so narrow that it
would be comparatively easy for the combinations of firms in many indus­
tries, e.g., motor cars, paper and electrical goods, to exercise some control
over it. Free trade is often an efficient way of breaking up domestic
monopolies. 
• Links with Other Countries: International trade and commercial relations
often lead to an interchange of knowledge, ideas and culture between
nations. This often produces a better understanding among those countries
and leads to amity and theory reduces the possibility of commer­cial rivalry
and war.
• Higher Efficiency and Optimum Utilization of Resources: Free trade
stimulates home producers, who face to foreign competition, to put forth
their best effort and thus increase managerial efficiency. Again, as under
free trade each country produces those goods in which it has the best
advantages, the resources (both human and material) of each country are
utilized in the best possible manner. 
• Evil Effects of Protection: Free trade is also advocated because it can
remove the evil effects of protection, such as high prices, growth of monop­
olies, etc. It is also immune from such abuses as ‘corruption and bribery’
and the creation of vested interests which often arise under a protectionist
system.
• Higher Earnings of the Factors of Production: Free trade increases the
earnings of all the factors as they are engaged in the production of those
goods in which the country has comparative advantage. It would increase
the productivity of each factor. 
• Increase in World Production and World Consumption: International
trade permits an industry to take full advantages of the economies of large-
scale. If certain goods were produced only for the home market, it would
not be possible to achieve the full advantage of large-scale production. So,
free trade increases the world production and the world consumption of
internationally traded goods as every trading country produces only the
selected goods at lower costs
DISADVANTAGES OF FREE TRADE
• It causes job loss through outsourcing: Tariffs tend to prevent job
outsourcing by keeping product pricing at competitive levels. Free of
tariffs, products imported from foreign countries with lower wages cost
less. While this may be seemingly good for consumers, it makes it hard for
local companies to compete, forcing them to reduce their workforce.
Indeed, one of the main objections to NAFTA was that it outsourced
American jobs to Mexico.
• It encourages theft of intellectual property: Many foreign governments,
especially those in developing countries, often fail to take intellectual
property rights seriously. Without the protection of patent laws, companies
often have their innovations and new technologies stolen, forcing them to
compete with lower-priced domestically-made fake products.
• It allows for poor working conditions: Similarly, governments in
developing countries rarely have laws to regulate and ensure safe and fair
working conditions. Because free trade is partially dependent on a lack of
government restrictions, women and children are often forced to work in
factories doing heavy labor under slave-like working conditions.
• It can harm the environment: Emerging countries have few, if any
environmental protection laws. Since many free trade opportunities involve
the exporting of natural resources like lumber or iron ore, clear-cutting of
forests and un-reclaimed strip mining often decimate local environments.
• It reduces revenues: Due to the high level of competition spurred by
unrestricted free trade, the businesses involved ultimately suffer reduced
revenues. Smaller businesses in smaller countries are the most vulnerable to
this effect.
• Obstacles to the Development of Home Industries: If foreign goods are
imported freely, the domestic industries of the developing countries would
not be able to develop rapidly due to the superior strength of foreign
industries. 
• Empire-Builder: Under free trade, the foreign traders particularly the
dominant ones may try to become empire-builders in future. In the past free
trade gave rise to colonialism and imperialism. 
• Rivalry and Friction: Finally, free trade sometimes creates rivalry and
frictions among the trading nations. In other words, commercial rivalries
resulting from trade often lead to war. This is an important point.
THANK YOU!