The Benefits of Free Trade: Addressing Key Myths

By: Donald J. Boudreaux and Nita Ghei

The growing rhetoric about imposing tariffs and limiting freedom to trade internationally reflects
a resurgence of old arguments that stay alive in large part because the benefits of free
international trade are often diffuse and hard to see, while the benefits of shielding specific
groups from foreign competition are often immediate and visible. This illusion fuels the common
perception that free trade is detrimental to the American economy. It also tips the scales in favor
of special interests seeking protection from foreign competition. As a result, the federal
government currently imposes thousands of tariffs, quotas, and other barriers to trade.

Restrictions on foreign trade all too often harm the very people they aim to protect: American
consumers and producers. Trade restrictions limit the choices of what Americans can buy; they
also drive up the prices of everything from clothing and groceries to the materials manufacturers
use to make everyday products. Moreover, lower-income Americans generally bear a
disproportionate share of these costs. Trade treaties increase freedom to trade and do not result in
loss of sovereignty; they are part and parcel of wider international relations and they are not new.

The Truths of Free Trade

Free trade increases prosperity for Americans—and the citizens of all participating nations—by
allowing consumers to buy more, better-quality products at lower costs. It drives economic
growth, enhanced efficiency, increased innovation, and the greater fairness that accompanies a
rules-based system. These benefits increase as overall trade—exports and imports—increases.

 Free trade increases access to higher-quality, lower-priced goods. Cheaper imports, particularly
from countries such as China and Mexico, have eased inflationary pressure in the United States.
Prices are held down by more than 2 percent for every 1 percent share in the market by imports
from low-income countries like China, which leaves more income for Americans to spend on
other products.
 Free trade means more growth. At least half of US imports are not consumer goods; they are
inputs for US-based producers, according to economists from the Bureau of Economic Analysis.
Freeing trade reduces imported-input costs, thus reducing businesses’ production costs and
promoting economic growth.
 Free trade improves efficiency and innovation. Over time, free trade works with other market
processes to shift workers and resources to more productive uses, allowing more efficient
industries to thrive. The results are higher wages, investment in such things as infrastructure,
and a more dynamic economy that continues to create new jobs and opportunities.
 Free trade drives competitiveness. Free trade does require American businesses and workers to
adapt to the shifting demands of the worldwide marketplace. But these adjustments are critical
to remaining competitive, and competition is what fuels long-term growth.
  Free trade promotes fairness. When everyone follows the same rules-based system, there is less
opportunity for cronyism, or the ability of participating nations to skew trade advantages
toward favored parties. In the absence of such a system, bigger and better-connected industries
can more easily acquire unfair advantages, such as tax and regulatory loopholes, which shield
them from competition.

Myth vs. Reality

1. Myth: More exports mean more wealth.

Reality: It is the total level of trade—exports and imports—that most accurately reflects
American prosperity. Prosperity is defined by the breadth and variety of what Americans are able
to consume. More exports increase wealth only because they allow Americans to buy more
imports and give non-Americans greater incentives to invest in America, helping the US
economy grow. Restricting imports leaves Americans worse off.

 Poorer Americans suffer more from tariffs than higher-income people. Not only do they spend
more of their income on consumption goods, many of the goods they consume are subject to
higher tariffs than more expensive goods of the same type.
 For example, imported cheap sneakers can face a tariff as high as 60 percent, while men’s
leather dress shoes are subject to an 8.5 percent tariff. Similarly, plain drinking glasses face a
tariff of nearly 30 percent, while expensive crystal glasses are taxed at 3 percent.

2. Myth: Free trade means jobs go overseas.

Reality: Free trade does not create more jobs, but neither does protectionism. Free trade may
reduce jobs in inefficient industries, but it frees up resources to create jobs in efficient industries,
boosting overall wages and improving living standards. Protectionism, in contrast, attempts to
protect jobs that the market will not sustain, at the expense of more innovative industries.

 Much of the change in the labor force is not the result of free trade but of innovation. New
technology, such as apps on mobile devices, has displaced a staggering variety of products,
including radios, cameras, alarm clocks, calculators, compact discs, DVDs, carpenters’ levels,
tape measures, tape recorders, blood-pressure monitors, cardiographs, flashlights, and file
cabinets.
 Using protectionist policies to “save” a job comes at enormous cost, as opportunities shrink and
input costs swell for industries downstream.

3. Myth: Restrictions on trade help Americans.

Reality: The only beneficiaries of trade restrictions are the inefficient firms and special interests
that lobby for these protections against competition.
  Despite receiving protection from foreign competition for many decades, large firms have
steadily left the US steel industry because of high fixed costs and competition from smaller
firms. Tariffs on steel increase costs in steel-consuming industries, which employ almost 13
million Americans, compared to the 140,000 Americans employed in the steelmaking industry.
 Other countries often retaliate against US tariffs. Tariffs on Chinese-made solar panels between
2012 and 2015 resulted in China imposing tariffs on American polysilicon, raising the cost of
solar equipment and reducing employment opportunities in both nations.

4. Myth: US trade deficits are bad for Americans.

Reality: US trade deficits generally are good for Americans.

The trade deficit is not debt. A growing trade deficit, despite its misleading name, is good for the
economy. It is typically a signal that global investors are confident in America’s economic
future. The US trade deficit might be larger than it would otherwise be if a trading partner
chooses to keep the price of its currency artificially low, but this practice harms the trading
partner, not the United States.

 America’s trade deficit increases whenever non-Americans choose to increase the amount they
invest in the United States. Dollars that leave the United States as part of the trade deficit must
come back as a “capital account surplus”—that is, the net investment funds flowing into the
United States. More investment means expansion of existing businesses, more new businesses,
higher worker productivity, and more output-enhancing activities, such as research and
development, all of which increase prosperity.
 So-called “currency manipulation” by a trading partner does not harm the American economy.
For example, a lower price of the yuan makes Chinese goods cheaper for American consumers,
conferring a real benefit on the United States. Keeping the price of the yuan lower through
monetary policy, however, does not lower the real costs of the resources and outputs exported
by the Chinese people, who also face higher prices for American imports. An undervalued
yuan—assuming this undervaluation to be real rather than fanciful—benefits Americans at the
expense of the Chinese.

5. Myth: Trade treaties require a surrender of sovereignty.

Reality: Trade treaties enhance freedom.

 Nation-states routinely ratify treaties on a range of issues, including human rights, treatment of
prisoners, and territorial waters, as well as international trade and financial transactions. Such
cooperation is the basis of public international law. Trade treaties are particularly valuable
because they contain provisions that help governments avoid the worst damage that
protectionism could inflict on their people.
 The “most-favored nation” and “national treatment” clauses of the General Agreement on
Tariffs and Trade require that nations treat all trading partners alike and do not discriminate
 between domestic and imported goods. This requirement of reciprocity helps assure
governments that gains from trade will be available for everyone.

Benefits of free trade

Free trade means that countries can import and export goods without any tariff barriers
or other non-tariff barriers to trade.

Essentially, free trade enables lower prices for consumers, increased exports, benefits
from economies of scale and a greater choice of goods.

In more detail, the benefits of free trade include:

1. The theory of comparative advantage

This explains that by specialising in goods where countries have a lower opportunity
cost, there can be an increase in economic welfare for all countries. Free trade enables
countries to specialise in those goods where they have a comparative advantage.

2. Reducing tariff barriers leads to trade creation

Trade creation occurs when consumption switches from high-cost producers to low-cost
producers.

 The removal of tariffs leads to lower prices for consumers (Prices fall from P1 to P2)
 This fall in prices enables an increase in consumer surplus of areas 1 + 2 + 3 + 4
 Imports will increase from Q3-Q2 to Q4-Q1
 The government will lose tax revenue of area 3. Tax revenue from imports was T (P1-P2) × (Q3-
Q2)
 Domestic firms producing this good will sell less and lose producer surplus equal to area 1
 However, overall there will be an increase in economic welfare of 2+4 (1+2+3+4 – (1+3)
 The magnitude of this increase depends upon the elasticity of supply and demand. If demand
elastic consumers will have a big increase in welfare
 Essentially, removing tariffs leads to lower prices for consumers – so the price of imported food,
clothes and computers will be lower. When the UK joined the EEC – the price of many imports
from Europe fell.

3. Increased exports

As well as benefits for consumers importing goods, firms exporting goods where the UK
has a comparative advantage will also see a significant improvement in economic
welfare. Lower tariffs on UK exports will enable a higher quantity of exports boosting UK
jobs and economic growth.

4. Economies of scale

If countries can specialise in certain goods they can benefit from economies of
scale and lower average costs; this is especially true in industries with high fixed costs
or that require high levels of investment. The benefits of economies of scale will
ultimately lead to lower prices for consumers and greater efficiency for exporting firms.

5. Increased competition

With more trade, domestic firms will face more competition from abroad. Therefore,
there will be more incentives to cut costs and increase efficiency. It may prevent
domestic monopolies from charging too high prices.

6. Trade is an engine of growth.

World trade has increased by an average of 7% since 1945, causing this to be one of
the significant contributors to economic growth.

7. Make use of surplus raw materials

Middle Eastern countries such as Qatar are very rich in reserves of oil, but without
trade, there would be not much benefit in having so much oil.
Japan, on the other hand, has very few raw materials; without trade, it would have low
GDP.

8. Tariffs may encourage inefficiency

If an economy protects its domestic industry by increasing tariffs industries may not
have any incentives to cut costs.

Economists on Free Trade

Adam Smith, The Wealth Of Nations (1776) Smith generally supported free trade
arguing countries should specialise in their areas of expertise. He made the argument
there is no point in protecting the Scottish wine industry if it would cost 30 times the
price of importing wine from warmer countries. Smith also argued that if our competitors
become better off, they will be able to buy more of our exports. Smith saw trade as a
way for all countries to become better off. This was in contrast to the zero-sum
Mercantilist theories popular at the time.

“As a rich man is likely to be a better customer to the industrious people in his
neighbourhood than a poor, so is likewise a rich nation. [Trade restrictions,] by
aiming at the impoverishment of all our neighbours, tend to render that very
commerce insignificant and contemptible.”
The Wealth Of Nations, Book IV, Chapter III, Part II, p.495, para. c11.

“If a foreign country can supply us with a commodity cheaper than we ourselves
can make it, better buy it of them with some part of the produce of our own
industry, employed in a way in which we have some advantage.”
 The Wealth Of Nations, Book IV, Chapter II, [link]
David Ricardo On the Principles of Political Economy and Taxation.(1817) Ricardo
made case for free trade on basis of comparative advantage. Ricardo tried to show that
removal of tariffs would lead to a net welfare gain – the gain of consumers outweighing
the loss of producers

“Under a system of perfectly free commerce, each country naturally devotes its
capital and labour to such employments as are most beneficial to each. This
pursuit of individual advantage is admirably connected with the universal good of
the whole.”
David Ricardo, On the Principles of Political Economy and Taxation (link)

John Maynard Keynes. Keynes was generally free trade and supported the logic of
specialisation

“In a regime of Free Trade and free economic intercourse it would be of little
consequence that iron lay on one side of a political frontier, and labor, coal, and
blast furnaces on the other. But as it is, men have devised ways to impoverish
themselves and one another; and prefer collective animosities to individual
happiness.”
John Maynard Keynes The Economic Consequences of the Peace (1920) Though it
worth bearing in mind Keynes wavered on free trade in some circumstances

Greg Mankiw argues that free trade is one area where economists are united

“Few propositions command as much consensus among professional economists as

that open world trade increases economic growth and raises living standards.” – Greg
Mankiw [link]

Joseph Stiglitz is more circumspect. Stiglitz argues free trade depends on individual
circumstance

Arguments against free trade

These are arguments put forward to justify putting restrictions on free trade. For
example, import tariffs or quotas.

1. Infant industry argument

If developing countries have industries that are relatively new, then at the moment these
industry’s would struggle against international competition. However, if they invested in
the industry then in the future they may be able to gain comparative advantage.


 This shows that comparative advantage can change over time
  Therefore protection would allow them to progress and gain experience to enable them to
be able to compete in the future.
 more on infant industry argument

2. The Senile industry argument

If industries are declining and inefficient they may require significant investment to make
them efficient again. Protection for these industries would act as an incentive to for firms
to invest and reinvent themselves. However, protectionism could also be an excuse for
protecting inefficient firms

3. To diversify the economy

Many developing countries rely on producing primary products in which

they currently have a comparative advantage. However, relying on agricultural products
has several disadvantages


 Prices can fluctuate due to environmental factors
 Goods have a low-income elasticity of demand. Therefore with economic growth demand
will only increase a little

4. Raise revenue for the government.

Import taxes can be used to raise money for the government – however, this will only be
a relatively small amount of money

5. Help the Balance of Payments

Reducing imports can help the current account as it restricts imports. However, in the
long-term, this is likely to lead to retaliation and also cause lower exports so it might
soon prove counter-productive.

6. Cultural Identity

This is not really an economic argument but more political and cultural. Many countries
wish to protect their countries from what they see as an Americanisation or
commercialisation of their countries

7. Protection against dumping

Dumping occurs when a country has excess stock and so it sells below cost on global
markets causing other producers to become unprofitable. The EU sold a lot of its food
surplus from the CAP at very low prices on the world market; this caused problems for
world farmers because they saw a big fall in their market prices. Other examples include
allegations that China has been dumping excess supply of steel on global markets
causing other firms to go out of business.
8. Environmental

It is argued that free trade can harm the environment because LDC may use up natural
reserves of raw materials to export. Also, countries with strict pollution controls may find
consumers import the goods from other countries where legislation is lax and pollution
allowed.

 However, supporters of free trade would argue that it is up to individual countries to create
environmental legislation

Economists against free trade

Friedrich List, The National System of Political Economy (1841)

List made a case for tariffs and protectionism. List argued that moderate tariffs could be
justified at certain times in economic development. List also accused developed
countries of pursuing a degree of protection when they needed it but then trying to force
free-trade on their competitors when they needed some protection. List used the phrase
‘“kicking away the ladder” – to describe this scenario.

To List, the aim is not just wealth but to improve a country’s means of production.
Moderate tariffs can enable countries to develop new manufacturing industries.

‘In order to allow freedom of trade to operate naturally, the less advanced nations must
first be [xxv] raised by artificial measures to that stage of cultivation to which the English
nation has been artificially elevated.”(p. 107)

“In the first stage they must adopt free trade with the more advanced nations as a
means of raising themselves from a state of barbarism and of making advances
in agriculture. In the second stage they must resort to commercial restrictions to
promote the growth of manufactures, fisheries, navigation, and foreign trade. In
the last stage, after reaching the highest degree of wealth and power, they must
gradually revert to the principle of free trade and of unrestricted competition in
the home as well as in foreign markets, so that their agriculturists, manufacturers,
and merchants may be preserved from indolence and stimulated to retain the
supremacy which they have acquired.”
Joseph Stiglitz

Stiglitz is a modern economist concerned that the benefits of globalisation are

inequitably distributed. Stiglitz argues free trade deals like recent TIPP are geared
towards powerful multinationals. Stiglitz argues

Theories of free trade assume efficient markets but in practise there are
immobilities for labour to move from old (inefficient industries) to new ones.
“The older theories, for instance, simply ignored risk, and assumed that workers
could move seamlessly between jobs… But when there is a high level of
unemployment, and especially when a large percentage of the unemployed have
been out of work long-term (as is the case now), there can’t be such
complacency.” (On wrong side of globalization at NYT)
Modern trade deals are often about reducing regulations (regulations on the protection
of labour, environment and consumers) and increasing power of multinationals.

Ha-Joon Chan is a modern economist who has been critical of free trade. In particular,
he has updated similar theories of Fredrich List is noting how many developed
economies used protectionism in their economic development. His books include Bad
Samaritans: The Myth of Free Trade and the Secret History of Capitalism

INTERNATIONAL ECONOMICS

Advantages Of Free Trade

By Prateek Agarw

Trade around the world is becoming increasingly barrier-free, but there are still many people who
think that free trade is bad for the economy. They believe that free trade hurts domestic
production, while that may be true, the advantages of free trade leads to increased competition
which means better quality products at a lower price for end consumers.

Advantages of Free Trade

1. Efficiency

With free trade, domestic firms face competition from abroad and therefore there will be more
incentives to cut costs and increase efficiency. Free Trade encourages an efficient utilization of scarce
resources.

2. Specialization

Free trade leads to specialization, where a country only produces goods that they are efficient at, i.e., in
which they have a lower opportunity cost. Specialization leads to higher levels of output.

3. Consumption

Free trade enables an increase in consumption as countries can consume combinations of goods outside
their production possibility curve.

4. Market Power
Without trade barriers, free trade decreases the market power of monopolies as they are competing at
a global level. It may also prevent domestic monopolies from charging too high prices.

5. Price

Local firms now have to compete against firms from all across the world, especially online. Competition
is a win for consumers who can enjoy the lowest of prices.

6. Technology

Technology can cross over borders more easily with free trade, and this often accelerates improvements
in technology.

7. Economies of Scale

If countries can specialize in certain goods they can benefit from economies of scale and lower average
costs, this is especially true in industries with high fixed costs. The benefits of economies of scale will
ultimately lead to lower prices for consumers and greater efficiency for exporting firms.

8. Variety

Provides consumers with a greater variety of goods as they can gain access to products from different
countries. This variety of choice leads to lower prices too.

9. Growth

Free trade leads to higher economic output as an increase in demand for local goods results in higher
exports. This in turn creates more jobs for the local economy and the country enjoys higher economic
growth.

Openness in Goods And Financial Markets

One of the ways to measure the openness in goods and financial markets is through the Measure of
Openness is the ratio of exports to GDP. In the USA, the measure of openness is 11%. Another measure
is the ratio of exports to tradable goods. Tradable goods are goods like cars and computers, but exclude
goods such as houses and haircuts. Sixty percent of total GDP is tradable goods.

Openness in Goods Markets

The ability of consumers to choose between domestic and foreign goods. No country has a completely
open economy. Most countries resort to tariffs, quotas, and other types of restrictions.

Openness in Financial Markets

The ability of investors to choose between domestic assets and foreign assets. Most countries are trying
to eliminate capital controls and move towards open capital markets.

Openness in Factor Markets

The ability of firms to choose where to operate and the ability of workers to choose where to work.
Countries try to have free trade areas. However, movements of plants and labor have resulted in heated
political debates in most countries.

Free Trade Agreements With Their Pros and Cons

Advantages and Disadvantages and Their Possible Solutions

KIMBERLY AM ADEO

Free trade agreements are treaties that regulate the tariffs, taxes, and duties that
countries impose on their imports and exports. The most well-known U.S.
regional trade agreement is the North American Free Trade Agreement.

Six Advantages

Free trade agreements are designed to increase trade between two or more
countries. Increased international trade has the following six main advantages:

1. Increased Economic Growth: The U.S. Trade Representative Office

estimates that NAFTA increased U.S. economic growth by 0.5% a year.
 2. More Dynamic Business Climate: Often, businesses were protected
before the agreement. These local industries risked becoming
stagnant and non-competitive on the global market. With the protection
removed, they have the motivation to become true global competitors.
3. Lower Government Spending: Many governments subsidize local
industry segments. After the trade agreement removes subsidies, those
funds can be put to better use.

1. Foreign Direct Investment: Investors will flock to the country. This adds
capital to expand local industries and boost domestic businesses. It also
brings in U.S. dollars to many formerly isolated countries.
2. Expertise: Global companies have more expertise than domestic
companies to develop local resources. That's especially true in mining, oil
drilling, and manufacturing. Free trade agreements allow global firms
access to these business opportunities. When the multinationals partner
with local firms to develop the resources, they train them on the best
practices. That gives local firms access to these new methods.

1. Technology Transfer: Local companies also receive access to the latest

technologies from their multinational partners. As local economies grow, so
do job opportunities. Multi-national companies provide job training to local
employees.

Seven Disadvantages

The biggest criticism of free trade agreements is that they are responsible for job
outsourcing. There are seven total disadvantages:

1. Increased Job Outsourcing: Why does that happen? Reducing tariffs on

imports allows companies to expand to other countries. Without tariffs,
imports from countries with a low cost of living cost less. It makes it difficult
for U.S. companies in those same industries to compete, so they may
reduce their workforce. Many U.S. manufacturing industries did, in fact, lay
off workers as a result of NAFTA. One of the biggest criticisms of
NAFTA is that it sent jobs to Mexico.
2. Theft of Intellectual Property: Many developing countries don't have laws
to protect patents, inventions, and new processes. The laws they do have
aren't always strictly enforced. As a result, corporations often have their
ideas stolen. They must then compete with lower-priced domestic knock-
offs.

1. Crowd out Domestic Industries: Many emerging markets are traditional

economies that rely on farming for most employment. These small family
 farms can't compete with subsidized agri-businesses in the developed
countries. As a result, they lose their farms and must look for work in the
cities. This aggravates unemployment, crime, and poverty.
2. Poor Working Conditions: Multi-national companies may outsource jobs
to emerging market countries without adequate labor protections. As a
result, women and children are often subjected to grueling factory jobs in
sub-standard conditions.

1. Degradation of Natural Resources: Emerging market countries often

don’t have many environmental protections. Free trade leads to depletion
of timber, minerals, and other natural resources. Deforestation and strip-
mining reduce their jungles and fields to wastelands.
2. Destruction of Native Cultures: As development moves into isolated
areas, indigenous cultures can be destroyed. Local peoples are uprooted.
Many suffer disease and death when their resources are polluted.
3. Reduced Tax Revenue: Many smaller countries struggle to replace
revenue lost from import tariffs and fees.

Solutions

Trade protectionism is rarely the answer. High tariffs only protect domestic
industries in the short term. But, in the long term, global corporations will hire the
cheapest workers wherever they are in the world to make higher profits.

A better solution than protectionism is the inclusion of regulations within trade

agreements that protect against the disadvantages.

Environmental safeguards can prevent the destruction of natural resources and

cultures. Labor laws prevent poor working conditions. The World Trade
Organization enforces free trade agreement regulations.

Developed economies can reduce their agribusiness subsidies,

keeping emerging market farmers in business. They can help local farmers
develop sustainable practices. They can then market them as such to consumers
who value that.

Countries can insist that foreign companies build local factories as part of the
agreement. They can require these companies to share technology and train
local workers.
The Bottom Line

Free trade agreements give countries access to more markets in the global
economy. But they have advantages and disadvantages.

On the plus side, FTAs can force local industries to improve competitively and
rely less on government subsidies. These can open new markets, increase GDP,
and invite new investments. They also allow companies to discover new
technologies and better ways of doing things.

On the downside, free trade agreements open a country to degradation of natural

resources, destruction of traditional livelihoods, and local employment issues.

Countries entering FTAs must protect their people and resources against the
negative effects. But trade protectionism is rarely the most effective solution.

The Benefits of Free Trade for Developing Countries

by Osmond Vitez; Reviewed by Michelle Seidel, B.Sc., LL.B., MBA; Updated February 12, 2019

Free trade is an economic practice whereby countries can import and export goods without fear of
government intervention. Government intervention includes tariffs and import/export bans or
limitations. Free trade offers several benefits to countries, especially those in the developing stage.
"Developing countries" is a broad term. According to a widely used definition, a developing country is
a nation with low levels of economic resources and/or low standard of living. Developing countries
can often advance their economy through strategic free trade agreements.

Increased Economic Resources

Developing countries can benefit from free trade by increasing their

amount of or access to economic resources. Nations usually have limited
economic resources. Economic resources include land, labor and capital. Land
represents the natural resources found within a nations' borders.

Small developing nations often have the lowest amounts of natural resources in
the economic marketplace. Free trade agreements ensure small nations can
obtain the economic resources needed to produce consumer goods or services.

Improved Quality of Life

Theoretically, free trade can improve the quality of life for a nation's citizens.
Nations can import goods that are not readily available within their borders.
Importing goods may be cheaper for a developing country than attempting to
produce consumer goods or services within their borders. Many developing
nations do not have the production processes available for converting raw
materials into valuable consumer goods.

Developing countries with friendly neighbors may also be able to import goods
more often. Importing from neighboring countries ensures a constant flow of
goods that are readily available for consumption. Making the process work to
benefit residents however requires a well regulated and functional government
which is not common in developing nations.

Better Foreign Relations

Better foreign relations is usually an unintended result of free trade. Developing

nations are often subject to international threats. Developing strategic free trade
relations with more powerful countries can help ensure a developing nation has
additional protection from international threats.

Developing countries can also use free trade agreements to improve their military
strength and their internal infrastructure, as well as to improve politically. This
unintended benefit allows developing countries to learn how they should govern
their economy and what types of government policies can best benefit their
people.

Improved Production Efficiency

Developing countries can use free trade to improve their production efficiency.
Most nations are capable of producing some type of goods or service. However,
a lack of knowledge or proper resources can make production inefficient or
ineffective.

Free trade allows developing countries to fill in the gaps regarding their
production processes. Individual citizens may also visit foreign countries to
increase education or experience in specific production or business methods.
These individuals can then bring back crucial information about improving the
nation's production processes.

Pros of Free Trade

by Osmond Vitez

Free trade is an economic theory that describes the import and export relations of multiple countries.
Countries engage in free trade relations when companies and individuals can import and export
goods free from government intervention. Government intervention can include tariffs, import limits
and/or bans on specific goods. Free trade offers several advantages to countries. In addition to
national benefits, businesses and individuals can also benefit from favorable free trade policies.

Lower Costs

Free trade allows companies to lower their business costs by using the cheapest
economic resources available. Traditionally, free trade allows companies to
import raw materials for producing business goods domestically. Companies can
also make direct investments into foreign economies to produce goods at a lower
cost in these environments. Goods manufactured in foreign countries can then
be exported to domestic economies with little to no government intervention.

Business technology also allows companies to outsource service departments,

such as technical support or customer service, to foreign countries. Nations who
engage in free trade policies often increase the favorability of their business
environment for business outsourcing.

Increase in Purchasing Power

Nations engaging in free trade can also increase the purchasing power of
businesses and individuals. Businesses may choose to purchase goods from a
foreign country if significant advantages exist from foreign currency exchange
rates. Fluctuating currency rates offer businesses a way to consistently offer low
price goods to consumers. Even though companies can produce certain goods
domestically, favorable currency exchange rates can provide companies with
better purchase opportunities. Foreign goods may also allow companies to
increase their profits by taking advantage of currency exchange rates.

Comparative Advantage
Comparative advantage is the economic theory that countries can produce a
certain type of good better than other countries. This theory often lies in the fact
that nations can have more natural resources than another country. Countries
can also have a large labor pool or other technical abilities for producing
consumer goods. A comparative advantage usually allows countries to maximize
the production efficiency of their labor force. Creating highly desirable goods
allows nations to generate high profits from exporting these items through the
use of free trade agreements with other countries.

Improves Economic Growth

Free trade usually allows nations to improve their economic growth opportunities.
Rather than relying on the fixed number of individuals in their domestic economy,
countries can engage in free trade to improve business opportunities. Smaller
countries may need to engage in free trade to acquire economic resources for
producing consumer goods or services. Emerging economic environments also
present high profit potential for companies exporting goods through free trade.
Emerging economies often have consumers or businesses looking to purchase
copious amounts of resources for production or consumption purposes.

Free Trade & Why It Is Important

by Osmond Vitez

Free trade is an economic theory that involves the analysis and function of importing and exporting
goods without restriction. Many nations engage in free trade to ensure their citizens have enough
economic resources or consumer goods for meeting various needs or wants. Free trade is built upon
the comparative advantage theory, promulgated by David Ricardo, an English political economist, in
the early 1800s.

History

Dr. Ricardo promoted the idea of free trade through the economic concept of
comparative advantage. A comparative advantage occurs when one nation can
produce goods better than another. Nations can then export these goods to other
countries that have a limited supply of these products. Free trade also affects the
use of economic resources to produce consumer goods. Nations with a limited
supply of certain economic resources can export these items to other countries,
which can transform them into valuable consumer goods.

Facts
Free trade can help nations develop the best economic policies for their citizens.
Companies willing to meet consumer demand for various items will look for the
cheapest resources or goods to increase supply. Nations engaging in free trade
allow companies to import resources or goods from international countries with
no government restrictions or tariffs. Governments placing restrictions or tariffs
on imported goods often increase a company’s cost of doing business in the
domestic economic market.

Wage Benefits

Free trade can help nations improve job opportunities in the economic market.
Companies allowed to maximize a nation’s natural economic resources can
develop a comparative advantage when producing consumer goods. This
comparative advantage usually allows companies to offer higher employee
wages, since few nations or companies are able to reproduce the specific goods.
The inability of other nations or companies to create substitute goods in the
marketplace allows companies to charge higher consumer prices and increase
gross profit.

Quality of Life Benefits

Nations can increase the quality of life for their citizens when engaging in free
trade. Free trade allows the lowest-priced goods to enter the marketplace. Low
consumer prices usually help individuals increase their purchasing power. Higher
purchasing power allows individuals to purchase more consumer goods with
fewer dollars. Not only does this increase an individual’s quality of life, it also
generates higher national economic growth through increased consumer
purchases.

Misconceptions

A common argument against free trade is the reduction of domestic jobs from the
increase in imported goods from international countries. This theory, usually
referred to as protectionism, has more devastating effects that outstrip any
benefits of saving jobs. According to the Library of Economics and Liberty,
protectionism increases consumer prices because nations are unable to obtain
the cheapest economic resources for producing goods. Companies also may
have to pay a higher wages for manual labor jobs, which also increase consumer
prices.

Free Trade: Advantages and

Disadvantages | Economics
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In this article we will discuss about the advantages and disadvantages of free trade.

Advantages of Free Trade:

The advocates of free trade put forward the following advantages of free trade:

(a) International Specialization:

Free trade causes international special-isation 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 specialisation. 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, specialisation
leads to an increase in total production.

(b) Increase in World Production and World Consumption:

International trade permits an industry to take full advantages of the economies of scale (large-scale
production). 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.

(c) 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.

(d) 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 commer-cial rivalry and war.

(e) Higher Earnings of the Factors of Production:

Furthermore, 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.

(f) 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.

(g) Higher Efficiency and Optimum Utilisation 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 utilised in the best possible manner.

(h) Evil Effects of Protection:

Free trade is also advocated because it can remove the evil effects of protection, such as high prices,
growth of monop­olies, 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.
Disadvantages of Free Trade:
But, free trade is opposed on several grounds.

(a) Excessive Dependence:

As a country depends too much on foreign countries, an outbreak of
war may upset its economy. During the 1991 Gulf War America
refused to sell its products to its enemies (i.e., Gulf countries).

(b) 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.

(c) 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.

(d) Import of Expensive Harmful Goods:

A country may also import expensive and harmful foreign goods.

(e) 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.

Conclusion:
At present times, no country in the world follows the policy of free
trade. Every country imposes some restrictions on the import and the
export of goods in the broader interest of the country. Finally, as T.
Scitovsky has pointed out, free trade can be shown to be beneficial to
the world as a whole but has never been proved to be the best policy
for a single country.
Advantages of Free Trade between Two
Countries
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Get the answer of: What are the Advantages of Free Trade between
Two Countries?

Trade between nations is based on Ricardian principle of comparative

advantage. Ricardo cited the example of England and Portugal in this
context. Both the countries can produce cloth and wine. But England
is relatively more efficient in cloth production and Portugal in wine.

Thus if each country specialises in the production of only one

commodity (in which it is relatively efficient) it can gain. Each can
have more of both the commodities than in the absence of trade. This
is possible if there is no government restriction on trade.

For simplicity, we use a two-country, two-commodity example, but it

will work for more countries or more commodities as well. Free trade
refers to absence of government restriction on foreign trade. And
Ricardo pointed out that free trade among nations leads to an efficient
allocation of the world’s limited resources.

Each country will be able to have more of all commodities than in the
absence of trade. Samuelson has argued that free trade increases
society’s consumption possibilities (by enabling it to go beyond its
production possibilities curve).

Sources of Gains from free Trade:

Now the question is— what are the sources of advantages of free trade
between countries? The important point is that it is possible for two
(or more) countries to increase output and economic well-being by
specialising on the basis of comparative advantage, regardless of how
that comparative advantage may have originated. So, the most
important source of gains from trade is increased labour productivity
due to specialisation.

There are two more benefits from trade besides the increased output
from comparative advantage. One is growing competition and the
other is economies of scale.

Thus, there are three sources of gains from trade, viz.:

(1) Increased output due to specialisation,

(2) Growing competition, and

(3) Advantages of large-scale of production.

Growing Competition:
International trade increases the number of competing firms from
whom consumers can buy. It thus widens their range of choice of
goods and suppliers. This benefit of trade is of considerable
significance in those c6untries where a few firms constitute a
particular industry If there are a few firms, each one will be a high-cost
producer.

The benefit of trade can be very important in such a situation. For

example, Indian car buyers can have a wide range of choice in cars if
there is free trade with other leading car-manufacturing nations like
the U.S.A. and Japan, even though there are only six to seven leading
car producers in India. Due to pressure of foreign competition,
domestic producers respond quickly to demands of some car buyers
for smaller and more fuel-efficient cars.

Economies of Scale:
Access to a large world market instead of a narrow domestic one may
enable firms to produce at low cost by operating on a more efficient
scale. If a commodity is mass produced due to a country s access to a
wide market, costs will fall.
Thus, consumers will enjoy a two-fold advantage – lower price and
larger volume. Producers of computers, automobiles, heavy machinery
and steel require a very large market in order to produce at a scale that
results in the lowest possible cost per unit.

You can add one more point. An improvement in the terms of trade is
also a source of gains from trade. A rise in the price of exports or a fall
in the price of imports implies an improvement in the terms of trade.

6 Advantages and Disadvantages of

Free Trade
By Crystal Lombardo
Free trade is a type of economic policy that allows member countries to import
and export goods among each other with lower or no tariff imposed. While
supporters say that it is a win-win situation for both consumers and traders
with free access to the market and information and without trade barriers, not
all people (including economists) agree, saying that this way of trading allows
for foreign competition to cause certain economic issues. To build a well-
informed opinion whether free trade is more beneficial than not, let us take a
look at its key advantages and disadvantages.

List of Advantages of Free Trade

1. It provides consumers with more options and the benefit of lower
prices.
Proponents argue that, with imported products from other countries with
lesser or without tariff, consumers can choose from a plethora of products,
unlike when there is monopoly in the market. Also, the high level of freedom in
this trade will result to reduced prices.
2. It benefits trading countries through competitive advantage.
It is stated that countries that have enough resources to produce certain
products will enjoy competitive advantage to specialize in such goods and be
their only suppliers to other countries. In return, the purchasing countries can
also benefit from the low prices of these imported products. Therefore, it is a
win-win situation for both trading nations.
3. It is a key to economic growth.
Countries that are engaging in free trade are seen to have richer economies.
By specializing in certain products with plenty of materials to make of, they
maintain a high level of productivity. Also, there exists productive competition,
where products are traded at lower prices. All these aspects are good for
economic growth.
List of Disadvantages of Free Trade
1. It will have an unfavorable effect on local businesses and producers.
Opponents argue that free trade is not beneficial to local businesses and
producers in terms of profits. They explain that, with the reduced or zero tariffs
imposed making foreign suppliers easily lowering their prices, local companies
have to compete with the prices, which they should do even if it is difficult for
them, or consumers will go for imported goods over their locally produced
products.
2. It would cause workers to live in desolate places for their jobs and be
paid with low wages.
Free trade is believed to force laborers in poorer countries to work long hours
and live in shanties without the basic facilities, just to be able to keep their
work and send money to their families.
3. It would rob the citizens of jobs that are supposed to be theirs.
Some groups say that this form of trading has taken away job opportunities for
the average American, as some manufacturers are encouraged to hire foreign
workers for cheaper labor and even relocate their facilities overseas.
The debate on free trade has remained to be a divisive issue between
proponents and opponents. But by weighing down its advantages and
disadvantages, we will be able to come up with a well-informed decision
ourselves.

The Benefits of Free Trade: A Guide For Policymakers

— Denise H. Froning
KEY TAKEAWAYS

1. Free trade is the only type of truly fair trade because it offers consumers the most choices and
the best opportunities to improve their standard of living.

2. Free trade promotes innovation because, along with goods and services, the flow of trade
circulates new ideas.

3. By supporting the rule of law, free trade also can reduce the opportunities for corruption.
BENEFITS OF FREE trade

The benefits of free trade are many and far outweigh any risks that foreign
competition might pose to the U.S. economy. These benefits fall into four major
categories.

Benefit #1: Free trade promotes innovation and competition.

Few people in America today sew all their own clothes, grow all their own food, build
their own houses, or buy only products made in their own states. It would cost too
much and take too much time, especially since Americans can acquire such items on
the open market with relative ease. The same principle of practicality and cost applies
on an international scale. It makes economic sense to buy a product from another who
specializes in such production or who can make it more easily or for less cost.

Indeed, access to a greater variety of goods and services is the purpose of trade.
Imports, then, are not a sacrifice, a necessary evil for the good of exporting. One
exports so that one may acquire goods and services in return. This logic is evident on
a personal level as well: A person works so that he has the means to buy necessities
and possibly even luxuries. One does not make purchases in order to justify working.

Free trade is the only type of truly fair trade because it offers consumers the most
choices and the best opportunities to improve their standard of living. It fosters
competition, spurring companies to innovate and develop better products and to bring
more of their goods and services to market, keeping prices low and quality high in
order to retain or increase their market share.

Free trade also spurs innovation. The U.S. market has demonstrated repeatedly,
particularly over the last decade, that competition leads to increasing innovation. This
is evident, for example, in the intense competition to create the latest personal
computer at the lowest cost. With the growth of electronic commerce has come
unlimited choices of goods and services and lower prices for products. Computers are
now available for free just for signing an annual Internet provider service
agreement. [6]

Benefit #2: Free trade generates economic growth.

By fostering opportunities for American businesses, free trade rewards risk-taking by

increasing sales, profit margins, and market share. Companies can choose to build on
those profits by expanding their operations, entering new market sectors, and creating
better-paying jobs. According to U.S. Trade Representative Barshefsky, U.S. exports
support over 12 million jobs in America, and trade-related jobs pay an average of 13
percent to 16 percent higher wages than do non-trade-related jobs. [10]

In other words, this is a win-win scenario for Americans and people of countries that
have been mired in poverty despite years of foreign aid. The advantage for poor
countries in being able to trade for capital--rather than having to rely on ineffective
assistance programs that are subject to waste or fraud--is that the payoff is more
immediate in their private sectors. Foreign investment allows their domestic industries
to develop and provide better employment opportunities for local workers. This
dynamic makes an increase in foreign direct investment one of the most important
benefits of free trade for developing nations. [18]

Benefit #3: Free trade disseminates democratic values.

Free trade fosters support for the rule of law. Companies that engage in international
trade have reason to abide by the terms of their contracts and international agreed-
upon norms and laws. The World Trade Organization, for example, compels its
member countries to honor trade agreements and, in any trade dispute, to abide by the
decisions of the WTO's mediating body.

By supporting the rule of law, free trade also can reduce the opportunities for
corruption. In countries where contracts are not enforced, business relationships fail,
foreign investors flee, and capital stays away. It is a downward spiral that especially
hinders economic development in countries where official corruption is widespread.
As Alejandro Chafuen, President of the Atlas Economic Research Foundation, has
noted, "True economic freedom is possible only under a system of limited government
with a strong rule of law. Economic freedom has little value if corruption in
government means that only a few will enjoy it." [19]

trade likewise can falter quickly in countries where customs officials expect kickbacks
at every checkpoint. In Western Africa, customs officials can stop trucks carrying
goods as often as every hundred yards just to collect another bribe, as Mabousso
Thiam, executive secretary of the West African Enterprise Network, testified at a
1999 Organisation for Economic Co-Operation and Development (OECD) conference
on corruption. [20] Such arbitrary checkpoints spring up when countries cannot pay
their customs officials livable wages, forcing them to choose between remaining
honest but failing to bring home enough money to feed their families or taking an
illegal bribe, as others often do. As U.N. Secretary General Kofi Annan has observed,

But free trade transmits more than just physical goods or services to people. It also
transmits ideas and values. A culture of freedom can flourish whenever a great
society, as 18th century economist Adam Smith termed it, emerges with the self-
confidence to open itself to an inflow of goods and the ideas and practices
accompanying them. A culture of freedom can become both the cornerstone and
capstone of economic prosperity.

Benefit #4: Free trade fosters economic freedom.

As the foregoing discussion shows, the ability to trade freely increases opportunity,
choices, and standards of living. Countries with the freest economies today generally
have adopted a capitalist model of economic development, remaining open to
international trade and investment. These countries include the United Kingdom and
many of its former colonies and dominions: Hong Kong, Singapore, New Zealand, the
United States, Australia, and Canada.

Chile, which benefits from a diverse European heritage, likewise demonstrates that
basing economic policies on a capitalist free-market model brings good results in that
region as well.

Consider the experience of China and Taiwan. In 1960, real per capita income in the
People's Republic of China tracked closely with that of the Republic of China on
Taiwan. In the late 1960s, however, the government in Taipei chose to institute
widespread reforms to guarantee private property, establish a legal system to protect
property rights and enforce contracts, reform the banking and financial systems,
stabilize taxes, distribute public land to individuals, and allow the market to flourish.
The result for Taiwan has been an astounding record of economic growth. (See Chart
2.)

The 2000 Index of Economic Freedom ranks Taiwan as the 11th freest economy in the
world. With its economic freedom came the rise of democratic institutions. For the
first time since the ruling party (the Kuomintang, or KMT) established a government
in Taipei 50 years ago, a democratic transition of power took place in Taiwan as Chen
Shui-bian, a candidate from a previously outlawed opposition party, assumed the
presidency on May 20, 2000.

Despite this success, opponents of permanent normal trade relations with China argue
that trade and economic liberalization will not bring democracy to mainland China or
improve its human rights record. These critics assert that democracy is simply too
foreign to the mainland--an argument that ironically echoes the mutterings of Asian
authoritarian regimes about "Asian values." The development of political and
economic freedom in Taiwan refutes such claims and points to the potential that more
political and economic freedom can develop in China. Such an outcome would be in
America's best interest> because it would enhance regional stability, increase
prosperity for the Chinese, and open China's immense market to Americans.
The U.S. trade agreement with China signed by the Clinton Administration in
November 1999 is a step in the right direction. It will help open the Chinese market to
American exports and foreign direct investment to an unprecedented degree.
Economic freedom is the biggest benefit of trade extension, both for American
companies looking to invest in China and for the Chinese people themselves. These
foundations of economic freedom not only will allow the Chinese people to gain
access to the outside world, but also will expose the Chinese government to--and
compel it to enforce--the international consensus on the rule of law. Such issues as
property rights and honoring contracts, which companies historically have found to be
a problem when trying to make deals in China, will be subject to a higher force.

Indian economist Barun Mitra explains it succinctly: "Traders in the marketplace are
like voters in a democracy. If [the] free flow of ideas is essential to sustain political
freedom and a democratic polity, then free trade is critical to sustain economic
freedom and an efficient marketplace. Liberty, after all, is indivisible." [25] Countries
that suffer under overregulation, corruption, and the lack of the rule of law benefit by
removing barriers to trade and allowing their citizens to participate directly in the
global marketplace.

Often, countries in Asia and the West can be widely disparate in the cultural and
political realms, with economic repression and economic freedom existing in both
regions. Nonetheless, a basic structure upon which to build economic freedom can be
found in countries as different as Bahrain (an Arab monarchy), Singapore (an
authoritarian city-state), the United States (a constitutional democracy), and
Switzerland (a federal system of cantons encompassing at least four different
cultures).

Conclusion

Societies that enact free trade policies create their own economic dynamism--fostering
a wellspring of freedom, opportunity, and prosperity that benefits every citizen. In
recent years, the United States has demonstrated the power of this principle. Nor are
American citizens alone in benefiting from those free trade policies that the U.S.
enacts. By breaking the cycle of poverty, America's free trade policies can enable
even the most impoverished countries to begin to create their own dynamic toward
prosperity.

Nevertheless, despite all the evidence to the contrary, the opponents of free trade will
continue to espouse the old argument that "the jobs created by globalization are often
less sustaining and secure than the livelihoods abolished by it [in poor
countries]." [33] Such a claim presupposes that some sort of agrarian utopia
previously existed in these countries and that their peoples will not reap the benefits of
economic development.

Clamoring to stop this wave of economic progress carried forward by technology and
innovation is akin to arguing that the United States, to cite just one example, was
better off before the Industrial Revolution. While one might argue that this was true of
the white male members of the landed classes (although even then such a claim is
dubious), for the majority of the population that did not enjoy such luxury, quality of
life has improved immeasurably.

The Industrial Revolution brought freedom of movement and increased opportunity to

all economic levels of society. It also set the stage for social and democratic progress
of a magnitude that would have been impossible earlier. And although history
suggests that this new era of market globalization may well be accompanied by new
problems for which the solutions once again will lie in the power of human ingenuity
and innovation, it also presents an unprecedented level of opportunity for people to
achieve economic freedom and greater prosperity.