Free Trade, Put Simply

Trade is the exchange of goods and services for money between companies, people and governments often in different countries. Free trade is a type of trade where there is a free exchange of goods and services between countries. In a free trade agreement, participating countries can sell their goods and services to one another without incurring additional financial barriers to trade known as tariffs. Tariffs are costs that producers must pay if they wish to sell to another country making trade more expensive, however, free trade removes these costs and makes it cheaper to trade. Of course, extra costs such as transport expenses still apply as the geographical barrier of distance will still exist, but the removal of government-imposed tariffs results in a cheaper and easier form of trade.

The European Union is a good example of both free trade and tariff trade (protectionism). Countries within the European Union’s single market can freely trade goods with one another as there are no tariffs between states. On the other hand, countries outside the single market must pay tariffs to sell their products into Europe. This is the customs union. The UK plans to leave the single market to have control over migration.

The Trans-Pacific Partnership (TPP) is a more recent trade agreement, however, the newly elected President Donald Trump signed an executive order, within days of becoming president, to withdraw the United States of America from the deal. The agreement involved twelve nations around the pacific, excluding China and Russia, with the goal of increasing trade.

Advantages of free trade:

More goods, cheaper

One argument for free trade is that it results in greater choice and cheaper prices for consumers. Without tariffs being imposed on goods and services entering your country, it is much easier for foreign products to be available in local markets. This means more choice for the consumer, and as a result of this, there will be more competition between home and foreign brands, resulting in cheaper prices for the consumer as firms try to outdo one another.

Efficient markets

Another argument in favour of free trade is that it gives companies larger markets to which they can sell their products. Lack of tariffs between countries makes it cheaper for firms to sell their goods abroad, thus expanding their market base. This gives them greater opportunities to increase efficiency and lower costs of production. For EU countries, being part of the EU’s single market gives companies free (in terms of no tariffs) access to a market of half a billion people. It also encourages companies and countries to specialise in certain industries, again with efficiency in mind.

Peace and stability

Proponents of free trade also argue that it can lead to ensuring peace between states. The thinking behind this is that countries that freely trade with one another will be less likely to go to war as their economies will be reliant on the economies of their trading partners. That is it would be detrimental to one’s own economy to go to war with another. One study (McDonald, 2004) found that: “A series of statistical tests demonstrates that higher levels of free trade, rather than trade alone, reduce military conflict between states”, showing that there is some empirical evidence for this analysis.

Cons of Free Trade:

Potential job losses ahead

Opponents of free trade often argue that it can result in jobs moving overseas, increasing unemployment in the home country. There is a strong argument that the ‘North American Free Trade Agreement’ (NAFTA) between the USA, Mexico and Canada has led to job losses in the USA. Imagine a world where country X and country Y start a free trade arrangement. Country X consumes and produces a lot of good Z, but country Y is more efficient at producing Z meaning its firms can produce it at a lower cost. Before the countries started their free trade agreement the tariffs meant that buying Z from Y cost more than buying it from X for consumers in country X. But as a result of the removal of tariffs and the start of the free trade deal, buyers of Z in country X will likely buy from country Y rather than their own nation due to the newfound relative cheapness. This means that Z-producers in X will likely decrease production and cut jobs due to less demand for the good.

Less competition, please!

Specialisation can increase efficiency and lower prices but it can lead to the weakening of a country’s firms and as a result the local economy. This is because free trade opens up a country’s markets to foreign competitors who could sell their goods for cheaper, undercutting local firms. If such local firms struggle to compete in a more global market then it could lead to them failing. This is one argument against free trade in the short run, particularly against free trade agreements between countries with different levels of economic development.

Future leverage?

-Opponents of free trade may also argue that a lack of tariffs leads to a lack of self-reliance of countries. Free trade may result in countries becoming reliant on the productions of other countries for goods and services vital to their economy. This may make the country heavily reliant on other nations, which could put them in a weak strategic position if trade is used as a leverage in international political negotiations.

Your thoughts!

Free trade is a hot topic these days. Let us know in the comments or on social media what you think of it.

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