free trade advantages and disadvantages essay

Free Trade: Advantages and Disadvantages | Economics

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 specialisation 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:

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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 industries, 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 commercial 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.

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Pros and Cons of Free Trade Agreements

Advantages of Free Trade Agreements

Disadvantages of free trade agreements, how to create effective trade agreements, frequently asked questions (faqs).

The Balance

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 United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA) on July 1, 2020.

The advantages and disadvantages of free trade agreements affect jobs, business growth, and living standards. For example, they can lead to increased job opportunities and business expansion but may also result in job displacement and economic inequalities.

Key Takeaways

Free trade agreements are contracts between countries to allow access to their markets.
FTAs can force local industries to become more competitive and rely less on government subsidies.
They can open new markets, increase gross domestic product (GDP), and invite new investments.
FTAs can open up a country to degradation of natural resources, loss of traditional livelihoods, and local employment issues.
Countries must balance the domestic benefits of free trade agreements with their consequences.

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

Increased Economic Growth

In 2003, the U.S. International Trade Commission estimated that NAFTA could increase U.S. economic growth by 0.1% to 0.5% per year. The USMCA is a modern trade agreement that recognizes the influence of technology on economies. It changed many original NAFTA rules and processes but also kept others intact.

According to the Brookings Institution, increased trade between the U.S., Canada, and Mexico since the USMCA took effect has helped the three countries account for almost a third of global GDP.

More Dynamic Business Climate

Before free trade agreements, countries often protected their domestic industries and businesses. This protection often made them stagnant and non-competitive in the global market. With the protection removed, they became motivated to become true global competitors.

Free trade agreements also contribute to foreign investment. This adds capital to expand local industries and boost domestic businesses. It also brings in U.S. dollars to many formerly isolated countries.

Lower Government Spending

Many governments subsidize local industries. After the trade agreement removes subsidies, those funds can be put to use elsewhere.

Industry 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 in the best practices. That gives local firms access to these new methods.

Technology Transfer

Local companies also receive access to the latest technologies from their multinational partners. As local economies grow, so do job opportunities. Multinational companies provide job training to local employees.

The biggest criticism of free trade agreements is that they are responsible for job outsourcing. Here are some of the primary disadvantages.

Increased Job Outsourcing

Why does this 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 laid off workers as a result of NAFTA. One of the biggest criticisms of NAFTA is that it sent jobs to Mexico.

The USMCA sought to address and correct these criticisms, requiring—for the first time in a trade agreement—that 40% to 45% of North American auto content be made by workers earning at least $16 per hour.

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.

Crowding 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 developed countries. As a result, they lose their farms and must look for work in the cities. This aggravates unemployment, crime, and poverty.

Poor Working Conditions

Multinational 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.

Reduced Tax Revenue

Many smaller countries struggle to replace revenue lost from import tariffs and fees.

Degradation of Natural Resources

Emerging market countries often don't have many environmental protections. Free trade leads to the depletion of timber, minerals, and other natural resources. Deforestation and strip mining reduce their jungles and fields to wastelands.

In addition to threatening environmental resources, free trade agreements threaten native populations as well. As development moves into isolated areas, indigenous cultures can be destroyed. Local people are uprooted. Many suffer disease and death when their resources are polluted.

Free trade agreements are designed to combat trade protectionism , which has its own downsides. Trade protectionism produces high tariffs and only protects domestic industries in the short term. 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 and then market them as such to consumers.

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.

What was the purpose of NAFTA?

NAFTA was created to promote cross-border trade among the U.S., Mexico, and Canada. The three countries sought to create a free trade agreement that would foster competition, increase investment opportunities, and create procedures for handling trade disputes. Although it had some serious downsides, NAFTA largely succeeded in achieving those goals. The United States-Mexico-Canada Agreement (USMCA) officially replaced NAFTA on July 1, 2020, to achieve the modern trade goals of the digital age.

What is the difference between free trade and fair trade?

Although these terms are often confused, there are significant differences between free trade and fair trade. Free trade agreements are aimed at fostering open trade between nations to improve economic growth among all involved parties. The fair trade movement is focused on fostering economic equity on a global scale so that workers who make goods in other countries receive fair wages and improve their lives and communities.

Office of the United States Trade Representative. " United States-Mexico-Canada Agreement ."

United States International Trade Commission. " The Impact of Trade Agreements: Effect of the Tokyo Round, U.S.-Israel FTA, U.S.-Canada FTA, NAFTA, and the Uruguay Round on the U.S. Economy ," Page 32.

Northwestern Journal of International Law and Business. " Trade and Technology Within the Free Trade Zone: The Impact of the WTO Agreement, NAFTA, and Tax Treaties on the NAFTA Signatories ," Page 84.

Congressional Research Service. " The North American Free Trade Agreement (NAFTA) ," Page 27.

Congressional Research Service. " The United States-Mexico-Canada Agreement (USMCA) ," Page 11.

ADB Institute. " Exploring the Trade-Urbanization Nexus in Developing Economies: Evidence and Implications " Pages 2, 7-13.

Brookings Institution. " Workers' Rights: Labor Standards and Global Trade ."

European Union Directorate-General for External Policies. " Addressing Developing Countries' Challenges in Free Trade Implementation ," Page 8.

World Trade Organization. " World Trade Report 2010: D. Trade Policies and Natural Resources ," Pages 126, 134, 136.

American University International Law Review. " Indigenous Peoples, Indigenous Farmers: NAFTA's Threat to Mexican Teosinte Farmers and What Can Be Done About It ," Page 1393.

Congressional Research Service. " The United States-Mexico-Canada Agreement (USMCA) ," Pages 1, 23-24.

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Pros and Cons of Free Trade

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What Is Free Trade? Definition, Theories, Pros, and Cons

U.S. Economy
Supply & Demand
Archaeology
B.S., Texas A&M University

In the simplest of terms, free trade is the total absence of government policies restricting the import and export of goods and services. While economists have long argued that trade among nations is the key to maintaining a healthy global economy, few efforts to actually implement pure free-trade policies have ever succeeded. What exactly is free trade, and why do economists and the general public view it so differently?

Key Takeaways: Free Trade

Free trade is the unrestricted importing and exporting of goods and services between countries.
The opposite of free trade is protectionism—a highly-restrictive trade policy intended to eliminate competition from other countries.
Today, most industrialized nations take part in hybrid free trade agreements (FTAs), negotiated multinational pacts which allow for, but regulate tariffs, quotas, and other trade restrictions.

Free Trade Definition

Free trade is a largely theoretical policy under which governments impose absolutely no tariffs, taxes, or 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.

In reality, however, governments with generally free-trade policies still impose some measures to control imports and exports. Like the United States, most industrialized nations negotiate “ free trade agreements ,” or FTAs with other nations which determine the tariffs, duties, and subsidies the countries can impose on their imports and exports. For example, the North American Free Trade Agreement (NAFTA), between the United States, Canada, and Mexico is one of the best-known FTAs. Now common in international trade, FTA’s rarely result in pure, unrestricted free trade.

In 1948, the United States along with more than 100 other countries agreed to the General Agreement on Tariffs and Trade (GATT), a pact that reduced tariffs and other barriers to trade between the signatory countries. In 1995, GATT was replaced by the World Trade Organization (WTO). Today, 164 countries, accounting for 98% of all world trade belong to the WTO.

Despite their participation in FTAs and global trade organizations like the WTO, most governments still impose some protectionist-like trade restrictions such as tariffs and subsidies to protect local employment. For example, the so-called “ Chicken Tax ,” a 25% tariff on certain imported cars, light trucks, and vans imposed by President Lyndon Johnson in 1963 to protect U.S. automakers remains in effect today.

Free Trade Theories

Since the days of the Ancient Greeks, economists have studied and debated the theories and effects of international trade policy. Do trade restrictions help or hurt the countries that impose them? And which trade policy, from strict protectionism to totally free trade is best for a given country? Through the years of debates over the benefits versus the costs of free trade policies to domestic industries, two predominant theories of free trade have emerged: mercantilism and comparative advantage.

Mercantilism

Mercantilism is the theory of maximizing revenue through exporting goods and services. The goal of mercantilism is a favorable 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.

Dominant in Europe from the 16th to the 18th centuries, mercantilism often led to colonial expansion and wars. As a result, it quickly declined in popularity. Today, as multinational organizations such as the WTO work to reduce tariffs globally, free trade agreements and non-tariff trade restrictions are supplanting mercantilist theory.

Comparative Advantage

Comparative advantage holds that all countries will always benefit from cooperation and participation in free trade. Popularly attributed to English economist David Ricardo and his 1817 book “Principles of Political Economy and Taxation,” the law of comparative advantage refers to a country’s ability to produce goods and provide services at a lower cost than other countries. Comparative advantage shares many of the characteristics of globalization , the theory that worldwide openness in trade will improve the standard of living in all countries.

Comparative advantage is the opposite of absolute advantage—a country’s ability to produce more goods at a lower unit cost than other countries. Countries that can charge less for its goods than other countries and still make a profit are said to have an absolute advantage.

Pros and Cons of Free Trade

Would pure global free trade help or hurt the world? Here are a few issues to consider.

5 Advantages of Free Trade

It stimulates economic growth: Even when limited restrictions like tariffs are applied, all countries involved tend to realize greater economic growth. For example, the Office of the US Trade Representative estimates that being a signatory of NAFTA (the North American Free Trade Agreement) increased the United States’ economic growth by 5% annually.
It helps consumers: Trade restrictions like tariffs and quotas are implemented to protect local businesses and industries. When trade restrictions are removed, consumers tend to see lower prices because more products imported from countries with lower labor costs become available at the local level.
It increases foreign investment: When not faced with trade restrictions, foreign investors tend to pour money into local businesses helping them expand and compete. In addition, many developing and isolated countries benefit from an influx of money from U.S. investors.
It reduces government spending: Governments often subsidize local industries, like agriculture, for their loss of income due to export quotas. Once the quotas are lifted, the government’s tax revenues can be used for other purposes.
It encourages technology transfer: In addition to human expertise, domestic businesses gain access to the latest technologies developed by their multinational partners.

5 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 grueling 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.

In the final analysis, the goal of business is to realize a higher profit, while the goal of government is to protect its people. Neither unrestricted free trade nor total protectionism will accomplish both. A mixture of the two, as implemented by multinational free trade agreements, has evolved as the best solution.

Sources and Further Reference

Baldwin, Robert E. " The Political Economy of U.S. Import Policy ," Cambridge: MIT Press, 1985
Hugbauer, Gary C., and Kimberly A. Elliott. "Measuring the Costs of Protection in the United States." Institute for International Economics, 1994
Irwin, Douglas A. "Free Trade Under Fire." Princeton University Press, 2005
Mankiw, N. Gregory. " Economists Actually Agree on This: The Wisdom of Free Trade ." New York Times (April 24, 2015)
Ricardo, David. " Principles of Political Economy and Taxation ." The Library of Economics and Liberty
What Is a Free Market Economy?
Understanding the Pros and Cons of Protectionism
What Is Profit Sharing? Pros and Cons
Gig Economy: Definition and Pros and Cons
What Is a Traditional Economy? Definition and Examples
What is a Closed Shop in the Workplace?
What Is International Economics?
Command Economy Definition, Characteristics, Pros and Cons
Socialism vs. Capitalism: What Is the Difference?
What Is a Commodity in Economics?
The Arguments Against Free Trade
What Does "Money" Mean in an Economic Context?
What Is Collective Bargaining?
Properties and Functions of Money as Currency vs. Wealth
What Is Neoliberalism? Definition and Examples
What Is Classical Liberalism? Definition and Examples

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 the 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 circumstances

The Economist

ECONOMISTS are usually accused of three sins: an inability to agree among themselves; stating the obvious; and giving bad advice. In the field of international trade, they would be right to plead not guilty to all three. If there is one proposition with which virtually all economists agree, it is that free trade is almost always better than protection. Yet the underlying theory is not readily understood by non-economists. And the advice that follows from it-protection does not pay-is seldom wrong.

From: Economist 1998

Arguments against free trade
Trade liberalisation
Globalisation
Mercantilism

| International Freedom and Trade International Freedom and Trade
| Policy Briefs Policy Briefs
| May 23, 2018

The Benefits of Free Trade: Addressing Key Myths

Donald J. Boudreaux
Download Publication PDF

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.

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.

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Free Trade Agreement (FTA)
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Free Trade Agreement (FTA): Definition, How It Works, and Example

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is a Free Trade Agreement (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.

The concept of free trade is the opposite of trade protectionism or economic isolationism.

Key Takeaways

Free trade agreements reduce or eliminate barriers to trade across international borders.
Free trade is the opposite of trade protectionism.
In the U.S. and the E.U., free trade agreements do not come without regulations and oversight.

Investopedia / Julie Bang

How a Free Trade Agreement (FTA) Works

In the modern world, free trade policy is often implemented by means of a formal and mutual agreement of the nations involved. However, a free-trade policy may simply be the absence of any trade restrictions.

A government doesn't need to take specific action to promote free trade. This hands-off stance is referred to as “ laissez-faire trade” or trade liberalization.

Governments with free-trade policies or agreements in place do not necessarily abandon all control of imports and exports or eliminate all protectionist policies. In modern international trade, few free trade agreements (FTAs) result in completely free trade.

The benefits of free trade were outlined in "On the Principles of Political Economy and Taxation," published by economist David Ricardo in 1817.

For example, a nation might allow free trade with another nation, with exceptions that forbid the import of specific drugs not approved by its regulators, animals that have not been vaccinated, or processed foods that do not meet its standards.

It might also have policies in place that exempt specific products from tariff-free status in order to protect home producers from foreign competition in their industries.

The Economics of Free Trade

In principle, free trade on the international level is no different from trade between neighbors, towns, or states.

However, it allows businesses in each country to focus on producing and selling the goods that best use their resources while other businesses import goods that are scarce or unavailable domestically. That mix of local production and foreign trade allows countries to experience faster growth while better meeting the needs of their consumers.

This view was first popularized in 1817 by economist David Ricardo in his book, "On the Principles of Political Economy and Taxation." He argued that free trade expands the diversity and lowers the prices of goods available in a nation while better exploiting its homegrown resources, knowledge, and specialized skills.

Mercantilism

Prior to the 1800s, global trade was dominated by the theory of mercantilism. This theory placed priority on having a favorable balance of trade relative to other countries and accumulating more gold and silver.

In order to attain a favorable balance of trade, countries would often place trade barriers like taxes and tariffs to discourage their residents from purchasing foreign goods. This incentivized consumers to purchase locally-made products, thereby supporting domestic industries.

Comparative Advantage

Ricardo introduced the law of comparative advantage , which states that countries can attain the maximum benefits through free trade. Ricardo demonstrated that if countries prioritize producing the goods that they can produce more cheaply than other countries (i.e., where they have a comparative advantage) they will be able to produce more goods in total than they would by limiting trade.

Advantages and Disadvantages of Free Trade

Rapid development.

Free trade has allowed many countries to attain rapid economic growth. By focusing on exports and resources where they have a strong comparative advantage, many countries have been able to attract foreign investment capital and provide relatively high-paying jobs for local workers.

Lower Global Prices

For consumers, free trade creates a competitive environment where countries strive to provide the lowest possible prices for their resources. This in turn allows manufacturers to provide lower prices for finished goods, ultimately increasing the buying power for all consumers.

Unemployment and Business Losses

However, there are economic losers when a country opens its borders to free trade. Domestic industries may be unable to compete with foreign competitors, causing local unemployment. Large-scale industries may move to countries with lax environmental and labor laws, resulting in child labor or pollution.

Increased Dependency on the Global Market

Free trade can also make countries more dependent on the global market. For example, while the prices of some goods may be lower in the world market, there are strategic benefits for a country that produces those goods domestically. In the event of a war or crisis, the country may be forced to rebuild these industries from scratch.

Free Trade Pros and Cons

Allows consumers to access the cheapest goods on the world market.

Allows countries with relatively cheap labor or resources to benefit from foreign exports.

Under Ricardo's theory, countries can produce more goods collectively by trading on their respective advantages.

Competition with foreign exports may cause local unemployment and business failures.

Industries may relocate to jurisdictions with lax regulations, causing environmental damage or abusive labor practices.

Countries may become reliant on the global market for key goods, leaving them at a strategic disadvantage in times of crisis.

Public Opinion on Free Trade

Free trade divides economists and the general public. Research suggests that economists in the U.S. support free-trade policies at significantly higher rates than the general public.

In fact, the American economist Milton Friedman said: “The economics profession has been almost unanimous on the subject of the desirability of free trade.”

Free-trade policies have not been as popular with the general public. The key issues include unfair competition from countries where lower labor costs allow price-cutting and a loss of good-paying jobs to manufacturers abroad.

The call on the public to "Buy American" may get louder or quieter with the political winds, but it never goes silent.

The View From Financial Markets

Not surprisingly, the financial markets see the other side of the coin. Free trade is an opportunity to open another part of the world to domestic producers.

Moreover, free trade is now an integral part of the financial system and the investing world. American investors now have access to most foreign financial markets and to a wider range of securities, currencies, and other financial products.

However, completely free trade in the financial markets is unlikely in our times. There are many supranational regulatory organizations for world financial markets, including the Basel Committee on Banking Supervision , the International Organization of Securities Commission (IOSCO) , and the Committee on Capital Movements and Invisible Transactions.

Examples of Free Trade Agreements

European union.

The European Union is a notable example of free trade today. The member nations form an essentially borderless single entity for the purposes of trade, and the adoption of the euro by most of those nations smooths the way further.

It should be noted that this system is regulated by a central bureaucracy that must manage the many trade-related issues that come up between representatives of member nations.

U.S. Free Trade Agreements

The United States currently has a number of free trade agreements in place. These include multi-nation agreements such as the United States-Mexico-Canada Agreement (USMCA), which covers Canada and Mexico, and the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR), which includes Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. There are also separate trade agreements with nations from Australia to Peru.

Collectively, these agreements mean that about half of all industrial goods entering the U.S. come in free of tariffs, according to government figures. The average import tariff on industrial goods is 2%.

All these agreements collectively still do not add up to free trade in its most laissez-faire form. American special interest groups have successfully lobbied to impose trade restrictions on hundreds of imports including steel, sugar, automobiles, milk, tuna, beef, and denim.

Why Were Free Trade Zones Created in China?

Starting in 2013, China began establishing free trade zones around key ports and coastal areas. These were areas where national regulations were relaxed in order to facilitate foreign investment and business development.

What Is a Free Trade Area?

A free trade area is a group of countries that have agreed to mutually lower or eliminate trade barriers for trade within the area. This allows participating countries to benefit from reduced tariffs while maintaining their existing protections for trade with countries outside of the area.

What Are the Arguments Against Free Trade?

Opponents often assert that free trade invites foreign competition with domestic industries, causing job loss and harming key industries. In some cases, free trade causes manufacturers to move their operations to countries with fewer regulations, rewarding companies that cause pollution or use abusive labor practices. In other cases, countries with weak intellectual property laws may steal technology from foreign companies.

Free trade refers to policies that permit inexpensive imports and exports, without tariffs or other trade barriers. In a free trade agreement, a group of countries agrees to lower their tariffs or other barriers to facilitate more exchanges with their trading partners. This allows all countries to benefit from lower prices and access to one another's resources.

McMaster University. " On the Principles of Political Economy and Taxation ."

The Wilson Center. " Chapter 3: Trade Agreements and Economic Theory ."

Federal Reserve Bank Of St. Louis. " Free Trade: Why Are Economists and Noneconomists So Far Apart? ," Page 1.

Kansas State University. " Landon Lecture (April 27, 1978) Free Trade: Producer Versus Consumer ."

European Union. " The European Union, What It Is and What It Does ."

European Union. " Trade ."

European Union. " Types of Institutions and Bodies ."

U.S. Customs and Border Protection. " Central-America-Dominican Republic Free Trade Agreement (CAFTA-DR) ."

U.S. Customs and Border Protection. " Free Trade Agreements ."

U.S. Customs and Border Protection. " U.S. - Mexico - Canada Agreement (USMCA) ."

Office of the United States Trade Representative. " Industrial Tariffs ."

Government of Canada. " Free Trade Zones in China ."

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12 Pros and Cons of Free Trade

Free trade occurs when it is left to its own devices. This means there is no interference with quotas, tariffs, or other restrictions when completing an agreement. The trade is based on market forces and demands instead of being encouraged through subsidies or restricted through taxation. No discrimination occurs.

Although free trade is often discussed in political conversations, it is rarely practiced in the modern world. Would switching to a system that encouraged free trade instead of the current system be beneficial to the nations of the world? Or would it cause more harm than good?

Here are some key points regarding the pros and cons of free trade to consider.

What Are the Pros of Free Trade?

1. Economic growth is encouraged. Even when taxes, tariffs, and other restrictions on trade are highly regulated instead of being fully eliminated, there is an economic benefit to all parties involved. Because of NAFTA (North American Free Trade Agreement), the US Trade Representative Office estimates that economic growth has been 0.5% higher annually than it would be if the free trade agreement was not active.

2. Lower taxes and barriers to entry increases business opportunities. Protections are put into trade agreements as an effort to protect local businesses. When these protections are removed, the result tends to favor the consumer because more competition from global entities can occur at the local level. This reduces stagnation within markets, though at the risk of eliminating smaller businesses from the equation. Lower taxation and fewer barriers to entry can also reduce pricing for customers.

3. It creates opportunities for foreign direct investment. When there are fewer barriers to trade agreements in place, foreign businesses form partnerships, make investments, and even directly enter new markets because there is the chance for higher profits. This helps isolated countries can develop their economic infrastructure. Nations like the US and Canada use agreements to maintain economic benefits for both through shared values and vision, promoting a better standard of living for everyone.

4. More expertise is brought into the process. Global companies generally have more expertise within their field that local companies that operate on a domestically regional level. This means specialty work can be completed for a lower price, more efficiencies can be built into the systems of operation, and fewer resources are required to produce goods or services. Local companies can even learn from global companies to improve their best practices by direct observation.

5. It reduces government expenditures. Local industry segments, such as agriculture, are often subsidized by local governments. By introducing new best practices and building new efficiencies into distribution systems, less money needs to be provided by the government to keep prices affordable at the local level. This means tax revenues can be funneled toward infrastructure, social programs, defense, or other needs that a society may have.

6. Resources transfer to the best possible people and organizations. The people who are the best at what they do will have the most opportunities to succeed in an environment of free trade. It also means anyone can change their stars and achieve their dreams because of the desire to work with those who are the best. Companies follow this principle by being able to develop or access new technologies or better best practices to help local economies grow. When that growth occurs, more employment opportunities can be realized as well.

What Are the Cons of Free Trade?

1. It causes employment opportunities to be outsourced. Global companies may bring more expertise and better practices to a local industry, but who gets those jobs? Free trade causes jobs to be outsourced because international workers are either more experienced, cheaper to hire, or are willing to work with fewer safety protections. Tariffs and taxation policies help to reduce labor outsourcing because it keeps product pricing at competitive levels.

2. There are reduced IP protections. Intellectual property rights may not be taken as seriously by foreign governments or competitors as they are domestically. Inventions, patents, and processes may be copied in an environment of free trade and that reduces the potential of a company being able to create good jobs at fair wages. Even when these protections are in place, there is no guarantee that a foreign government will enforce the laws with the same rigor as a domestic government.

3. It encourages urbanization. There are two farms. One is a small family operation, while the other is a factory farm operation. The factory farm receives the same subsidies as the family operation, but because they produce many more products, they receive much more help from the government. This allows them to sell products at lower prices, which stores like because it generates more sales. Eventually, the family farm must either find its own niche to compete or the workers must look for employment elsewhere. That is why free trade often encourages urbanization.

4. There are often sub-standard working conditions. Emerging markets and developing countries do not usually have the same laws in place that guard worker salaries and working conditions. Some markets even allow for children to be hired for heavy labor and factory positions that are sub-standard at best. Because free trade puts a point of emphasis on the lack of restrictions, it can promote poor working conditions that people are forced to endure if they wish to earn a living for their family.

5. It does not usually protect the environment. Many free trade opportunities are based on the availability of natural resources. This causes the fastest harvesting methods possible to be used, such as clear-cutting or strip mining, and that can create long-term damage for local environments. It also means that natural resources are quickly depleted for the local population. An economy that is built on this process will often fail because once the resources are gone, there is nothing left to trade.

6. Free trade reduces revenues. When free market principles can operate without being checked, revenues typically reduce because of high competition levels. This helps large countries, organizations, and entities because they are already priced into an economy of scale. Smaller countries, companies, and entities must find ways to replace the revenues they lose and this is not always possible.

The pros and cons of free trade show that it can be beneficial, but it must be approach by looking at the long-term consequences will be. The goal for any company is to improve profits. The goal of any government is to provide the best possible protections for its people. Full trade protectionism will not do this, but neither will free trade. The best solutions tend to be a mixture of the two so that safeguards can be put into place to protect everyone.

19 Advantages and Disadvantages of Free Trade

Free trade occurs when there are agreements between two or more countries to reduce barriers to the import and export markets. These treaties usually involve a mutual reduction in duties, taxes, and tariffs so that the economies of every country can benefit from the various trading opportunities. One of the most well-known examples of this approach is the USMC Agreement, which replaces NAFTA to govern free trade across North America.

Free trade agreements allow a country to have access to more markets throughout the world. It can encourage local industries to improve their competition while relying less on subsidies from the government. It is a process that can lead to the opening of new markets, and improvement in GDP figures, and new investment opportunities.

When free trade involves a developed country and one that has yet to fully industrialize, then there can be an exploitation of natural resources that occurs. Some households might see the traditional livelihood fade away for modern jobs. It can even cause problems in the domestic employment sector for all involved parties.

The advantages and disadvantages of free trade show us that any nation deciding to enter into an agreement must take proactive steps to guard their resources and people against exploitation without resorting to protectionism.

List of the Advantages of Free Trade

1. Free trade creates economic growth opportunities. The free trade agreements in North America helped the U.S. economy grow by an average of 0.5% per year more than it would have otherwise. When countries can freely move products across borders, then each nation gets to take advantage of the manufacturing, commercial, and industrial strengths of every other economy in the agreement. That means there are lower cost burdens to worry about with each transaction, prices stay lower, and there can be healthy competition in the market.

2. There are more opportunities for foreign direct investment. When nations remove the barriers that are in place for free trade, then more companies are willing to invest in other countries. There are new investments, partnerships, and opportunities that develop because of this approach in markets of any size. That means you can focus on creating deeper, more fulfilling relationships with other governments who share the same perspective of the world today. Countries with shared borders can promote a better standard of living because it is harder to go to war with someone who is your economic partner.

Between 1994-2019, the policies of free trade allowed for an average of $25.6 billion in foreign direct investment to support the American economy each year. The second quarter of 2018 saw a record of $55.83 billion in that three-month period alone.

3. It lowers the taxes that consumers and businesses pay. The inclusion of tax and investment protection in free trade agreements make it possible to guard the interests of local business owners more efficiently. When these safeguards disappear, then the result tends to favor the consumer because more competition from global agencies can happen at the level of consumption.

This advantage reduces stagnation within markets, though at the risk of eliminating smaller businesses from the equation. Lower assessments and fewer restrictions to entry can also reduce pricing for customers.

4. Fewer government expenditures occur because of free trade. Several domestic industries receive financial benefits from the government, including farming and other areas of agriculture. This money goes from the taxpayer to the producer as a way to counter the impact that tariffs have on the import and export markets.

By injecting new best practices and creating new competencies into the domestic delivery systems, less government money is necessary to keep prices affordable at the local level. This advantage means that the tax revenues can go toward infrastructure needs, social programs, defense, or other community requirements without keeping unprofitable business ventures afloat.

5. It creates better goods. When free trade occurs, then each market receives more access to higher-quality goods at lower prices. Cheaper imports help to ease the pressure of inflation in the United States because of the American relationships with China and Mexico. Prices are held down by over 2% for every 1% share in the market of imports that come from countries with a lower income level. That means the average U.S. household has more money to spend on other products. The requirement of innovation here means that businesses are constantly finding ways to solve problems for consumers.

6. Free trade involves more than just consumer goods. At least 50% of the imports to the United States each year are not consumer goods. They are inputs for producers who are based in the U.S. so that domestic production costs can go down. This advantage also promotes economic growth because it diversifies the supply chain for an organization of any size. Even micro-businesses, freelancers, and gig specialists can benefit from this advantage because the Internet provides immediate access to cheaper goods, new research, and service expansion opportunities.

7. It helps the people who have the least amount of money to spend. Some people believe that more wealth can only come when a country can export more of its goods or services to other nations. The economic reality of free trade is that it is the total level of imports and exports that accurately reflects prosperity. When the people at the lower tier of the national income levels have more money to spend, then the entire economy benefits. That’s why the removal of tariffs is such an integral part of this process.

Cheap sneakers that come from China might have an import as high as 60% some years in the United States. If you were to purchase a part of Italian leather dress shoes, the tariff might be less than 9%. Regular drinking glasses have a tariff of almost 30%, but crystal glasses have one at 3%. When more Americans can buy cheap imports, then it encourages non-Americans to invest more in the country.

8. Free trade creates more opportunities to solicit workers with expertise. Automakers sent jobs to Mexico because of NAFTA, and then decided to import the vehicles back to the United States because of the favorable tariff policies. Although this issue took some jobs from American laborers, it also gave companies the chance to find workers from almost anywhere in the world with the right levels of expertise. By looking to foreign markets for this help, the costs stay down for the manufacturing process to maintain pricing at competitive levels.

This advantage also means that multiple economies around the world can benefit from this approach. It is one of the reasons why India has one of the fastest-growing Middle Class sectors in the world today.

9. Experts get to have access to the most resources with free trade. Free trade agreements attempt to put the most opportunities into the hands of the people who can create successful outcomes. There are no border restrictions to this advantage. That’s why anyone can become whatever they want to be in life if they have access to an economy built on this principle. The amount of competition that becomes available is the primary driver of what local populations think is possible. Anyone can become what they want to be in life if they work hard enough to reach their goals thanks to the fewer economic restrictions that exist with this opportunity.

List of the Disadvantages of Free Trade

1. Free trade does not create more jobs. It is a myth to say that free trade encourages employers to send their jobs overseas. It would also be incorrect to say that the increase in competition would create more employment opportunities. It reduces the number of opportunities that are available in inefficient industries. The positions that do remain will see a boost to their overall wages and an improvement to the standard of living, but it doesn’t ship the unwanted jobs overseas. It eliminates the policy of saving a job at any cost, even if opportunities are shrinking in that industry.

Free trade is responsible for 20% of the job losses that occur in the world today. When these agreements are made with highly capable countries or those with relatively few products, then there might be zero job creation measures that develop over time.

2. It encourages more urbanization. When you look at a map of the United States, you will find an interesting trend. The households who live in urban areas typically lean to the political left, while those in the rural regions vote more toward the right. Free trade encourages families to move away from agricultural work because it is more efficient to let factory farms take care of the food supply. That means more people move into the cities, encouraging urbanization so that there isn’t any money saved from the efforts to keep trading lanes open.

3. There are more risks for currency manipulation. When China allegedly made an effort to devalue its currency in response to U.S. tariff demands, the stock market had its worst day in 2019. Then the reality of the situation set in for investors. Lower yuan values make Chinese goods cheaper for American consumers. It counters the process of a tariff by creating lower prices through monetary policy. That also means Chinese consumers purchasing American goods must pay more for their items. When this disadvantage is considered, then one set of consumers always win and the other always lose. Free trade attempts to regulate this process, but the agreements cannot account for unanticipated manipulation that occurs outside of the system.

4. There can be fewer intellectual property protections because of free trade. IP rights are not always taken as seriously by international governments or business rivals as they are in a firm’s home nation. Patents, processes, and other inventions, including branding, graphic displays, and imaging, are sometimes copied in the free trade environment. This disadvantage lessens a company’s opportunities to bring new jobs at the local level while providing reasonable wages.

Even when there are IP rights protections in place because of a free trade agreement, there are guarantees that foreign governments will enforce the laws with the same rigor as the local government.

5. The developing world doesn’t always have worker safeguards in place. Developing countries and emerging markets rarely have the same laws in place that protect employee wages or the conditions in the workplace. Some nations even permit the hiring of children for factory jobs or heavy labor needs that place them in dangerous, sub-standard conditions. Some workers in Jordan that produce clothing for American retailers might work 20-hour days, not receive a paycheck for months, and then face jail time or physical abuse from supervisors if they complain.

The reason for this disadvantage involves the competition requirement for free trade. The goal is to create an overall lack of restrictions so that consumers can watch their spending. That means compromises are possible, promoting poor working conditions that workers must endure if they want to continue earning a living for their family.

6. Environmental protections are minimal in free trade. Free trade agreements rarely protect the environment. The goal for businesses in developed nations is to exploit the natural resources in other regions where restrictions or regulations may not be as stringent. Then the fastest, cheapest methods of creating goods or performing services becomes the point of emphasis. Strip mining, clearcut logging, and other problematic behaviors can increase global emissions, even though the activities might not count on their domestic scoreboard.

The developing world often sells short-term gains for long-term problems. Money from the natural resource trading can fund government operations or encourage corruption, allowing the wealthy to benefit while the working poor struggles to survive. Unless new industries develop, the money from this initial investment will eventually disappear.

7. There can be fewer revenue generation opportunities in free trade. Higher competition levels can create lower revenue potential in the industries impacted by free trade the most. Some firms, such as Walmart, are large enough to operate on a massive scale so that they can avoid this disadvantage. Those razor-thin margins make it a challenge for small business owners to provide meaningful services.

This disadvantage even applies to the gig economy. When a service provider in the United States charges $30 for a service, someone in a developing country might get the same value from a $5 purchase. That cost difference makes it impossible for the one provider to stay competitive if the quality of services is equal.

8. It can stiffen international competition for domestic economies. Free trade agreements only guarantee that there are gains that occur because of enhanced activities in the import and export markets. There is no way to determine who will benefit the most from an arrangement with few, if any restrictions. Rising productivity in foreign countries might cause induced changes to grow, which means the international competition in some industries can put additional pressure on the overall market. Because free trade doesn’t assign specific industries to any particular country, there is no way to determine in advance if a positive outcome is possible.

9. Customers are left at the mercy of the largest providers. When companies grow larger, then they can accrue more money. When there is additional wealth available to an agency, then there is enough influence available to start shaping economic policies. Large multinational firms have the power to offer lower prices, but many of them choose not to do so because there is no need for that action to occur. Customers are forced into an economy of scale, purchasing items from an oligarchy where price controls may be non-existent. That means your personal access to affordable goods is entirely reliant on the generosity of the C-Suites of each agency for every industry.

10. There can be opportunities for immigration outsourcing. When NAFTA first came about, the free trade agreement made it easier for people in North America to travel or immigrate to all three countries. If you had a specific skill set that was in demand, then your living situation could be expedited. The current version of the USMCA allows for this to some extent as well. Companies don’t always outsource jobs, but people can outsource themselves because of the loosening of population movement restrictions in a free market.

Verdict of the Advantages and Disadvantages of Free Trade

Free trade gives countries of any size an opportunity to create new economic opportunities for themselves. It is a way to increase choice at the domestic level, control costs, and encourage innovation in the targeted industries and commercial sectors.

When there are fewer tariffs in place, then the government will lose funds that it might have already budgeted in previous years. There can also be regulatory problems that occur as global businesses attempt to get a piece of the pie.

The overall advantages and disadvantages of free trade show that when multiple countries can work together to create mutual benefits, then the global economy can gain strength. That is why trade wars can be such a devastating problem too. Domestic consumption can only take a company so far.

15 Advantages and Disadvantages of Free Trade Policy in Economics

Free trade agreements are treaties which regulated the duties, taxes, and tariffs which countries impose on the imports they receive or exports that are sent. Numerous treaties exist which follow this process, with one of the most lucrative being the North American Free Trade Agreement that was recently renegotiated to become the United States, Canada, and Mexico Agreement.

When such an agreement is in place between 2+ countries, then they are able to move goods and services with more freedom across borders. This structure creates economic opportunities for all the parties involved, including a chance for workers to immigrate with fewer restrictions to take advantage of better jobs that may be available to them.

There are always significant advantages and disadvantages to consider with any contractual arrangement, so here are the pros and cons of free trade to consider.

List of the Pros of Free Trade

1. Free trade increases economic growth for each country. In the United States, the economy grew at roughly 0.5% more during the 25 years that NAFTA was in place compared to what it would’ve been if the free trade in North America had remain the same. Mexico experienced an increase in job opportunities from the free trade arrangement, while Canada was able to increase its export opportunities to its neighbors from the south. Although the countries were already exchanging $1 trillion in goods and services before the agreement, this volume expanded by over 125% after it went into effect.

2. It offers a more attractive business climate to organizations. Businesses are often protected when countries are trading with one another frequently. When there is a free trade agreement in place, then these protections begin to disappear. This process creates more of a free market environment where companies are forced to look for new ways to innovate as a way to stay competitive in the marketplace. Instead of allowing for stagnation to occur because there is always a guaranteed income, governments pursuing free trade increase economic opportunities because they inspire new processes.

3. Free trade will usually lower government spending habits. One of the ways that a government works to protect its local industry segments is through the use of subsidies. These benefits may include tax incentives, monetary rebates, protective tariffs, and other market manipulations which allow the corporation to function closer to a monopoly then if it were forced to compete on a global stage. Free trade lowers the expenses that for which a government must budget because companies no longer require the same protections. They can become competitive in multiple markets all at once. This spending on protectionism can then be applied to other societal needs.

4. It offers consumers access to a higher level of expertise. When companies are operating in international affairs, they have more access to information. This data allows them to create more effective best practices that will eventually help them to save money because they can cut the costs of their overhead. With the presence of free trade in the economy, these organizations can then provide access to their experience by working with domestic providers who are serving local households. That makes it possible for everyone to benefit from the expanded trade opportunities.

5. Free trade can improve the safety of workers. When companies are reviewing their best practices, then there are several sectors that they review for improvements. Employee safety is usually one of the first beneficiaries of a free trade agreement. This outcome is especially relevant when considering the manufacturing, mining, and oil producing industries. When workers can stay safe on the job, then they can remain productive, helping each organization to eventually improve its bottom line.

6. It allows for companies to transfer technologies to one another. When there is a free trade agreement in place, then the multinational companies make it possible for local organizations to receive access to the latest technologies from their industry. This process makes it possible for the local economy to start growing, which means there are additional job opportunities that begin to develop. The transnational corporations can even help provide training at the domestic level as a way to provide experience to future workers who may want to reach out to the global community one day.

7. Free trade results in higher levels of foreign direct investment. When there are fewer restrictions in place for companies who want to do business overseas, then domestic organizations and local communities benefit from a higher level of foreign direct investment. These funds help to add capital as local industries begin to look at the potential for expansion efforts. It is also a way to boost the influence that domestic businesses have within the region.

From the perspective of the United States, this advantage of free trade makes it possible to provide a currency of value (namely the U.S. dollar) to developing countries that would normally stay isolated without an agreement in place.

8. It can provide a direct economic boost to border communities. When there is a land border between two countries that have a free trade agreement, then the import/export transactions for the two governments occur at the ports of call which exist along this line. This structure has a positive effect on both local economies almost immediately. During the first year of NAFTA, the apparel and metal industries in Texas saw 13% growth because of the number of additional exports that were going across the border to Mexico.

List of the Cons of Free Trade

1. It reduces the tax revenues that are available to the government. A free trade agreement creates a shift in how value enters the society. Before there is an implementation of this contract type, goods and services develop revenues for the government through the use of tariffs and fees. Once this agreement goes into effect, then the money flows to the corporations instead. It then becomes the government’s responsibility to collect taxes from the profits and revenues earned from the new structure. That is why many smaller countries try to avoid free trade. They often struggle to replace the revenues that import tariffs and miscellaneous fees generate for them.

2. Free trade can reduce the influence of native cultures. As free trade begins to move into the isolated areas of a country, the indigenous cultures which are present there can sometimes struggle to adapt to the changing realities. There may be a need to access the resources which are available locally to these tribes for the “greater good” of the rest of the country. If the decision is made to pursue this need, then it is not unusual for local communities to be uprooted. Their exposure to new population groups can then result in disease, suffering, and even death in extreme circumstances.

3. It can begin to degrade the value of domestic natural resources. Countries that have already gone through their industrial revolution will typically have fewer natural resources available to them when compared to the developing world. That creates the purpose of pursuing a free trade agreement in the first place. These emerging market countries do not have the same environmental protections in place because they have not experienced the same pollution challenges as the developed world.

That is why free trade agreements can often lead to the depletion of natural resources through mining, timber operations, and mineral extraction. It does not take long for the fields and jungles of a developing country to be reduced to wasteland because of strip-mining and deforestation efforts.

4. Free trade can encourage poor working conditions. The minimum monthly wage for garment workers in the United States in 2017 was $1,864. If a free trade agreement was created with the countries of Southeast Asia, then corporations could take advantage of the lower minimum monthly wage in Bangladesh. Companies were required to pay their workers a minimum salary of $197 per month. Now imagine that you have 10,000 workers who are producing apparel items for you. Where would it be cheaper to manufacture your items?

The issue is more than one of wages. It is also a concern about working conditions. The developing world does not have the same protections in place for workers. Some locations do not even have restrictions on youth labor. Although a free trade agreement can encourage local development that improves this issue, there is no guarantee that it will happen.

5. It can eliminate the presence of domestic industries. When there is a multinational company trying to do business in a local community, then the mom-and-pop shops have no way to compete. That is because the organizations which are involved in multiple markets can operate on a larger scale than small domestic businesses. Even though the giants of each industry work with small businesses to encourage a healthy economy, it is the Walmarts and Amazons of the world which can always offer consumers a better price. If a customer has the choice to purchase the same item from a family-owned business at $6 or one from Walmart for $2, the latter options usually wins out.

6. Free trade can encourage the theft of intellectual property. When the United States and China put together a free trade agreement, there was a belief on the American side that it would be possible to expand business opportunities exponentially with market access overseas. Then the reality of the situation hit. Chinese companies, which are all mostly owned by the government, required Americans to sign over their intellectual property rights as a way to gain access to the market. It created a net win for China and a net loss on the U.S. side because if the American companies refused, the Chinese ones just stole it anyway.

7. It can result in more job outsourcing. Let’s go back to that idea where a garment industry firm could pay employees $1,600 less per month by shifting production from the United States to Bangladesh. Even if there are more logistics issues to worry about after the job outsourcing occurs, there is nothing in place to stop the company from reaping significant rewards. That is why tariffs are often in place from the very start. It creates a disincentive for organizations to outsource their labor, and then import the product back to consumers at the same price. U.S. manufacturers did that after the creation of NAFTA because of the differences in labor cost too

The pros and cons of free trade are generally positive because it creates a system that is closer to a free market with the countries involved with the contract. Although there are challenges to consider, especially with a poorly-written agreement, it is the consumer who wins at the end of the day. When they have access to more innovation and expertise, then they can have their problems solved more effectively.

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A healthy re-examination of free trade’s benefits and shocks

An interview with john van reenen of mit.

ECONOMISTS have long argued that free trade makes everyone richer. But lately that view has come under attack, most notably from President Donald Trump. Economists are asking themselves some tough questions. Is free trade always a good thing? Do the losers from free trade need to be compensated? To explore the basics of free trade, The Economist spoke to John Van Reenen an economist at MIT. The conversation has been lightly edited for clarity.

The Economist : At its most basic level, what is free trade?

John Van Reenen : Free trade means allowing goods and services to move as freely as possible across different countries. As countries developed, they started making and swapping things among people within the borders of their own country. As transport improved, they could start buying and selling stuff abroad. For a long time there were big barriers to international trade. At a time when governments struggled to raise tax from their own people, levying heavy import duties on things coming in from abroad was easier to implement. But economists eventually won the argument, which said that keeping those barriers as low as possible was sensible policy.

With free trade, you come into more contact with foreign companies, new ideas, new people

The Economist : Is free trade good for economic growth?

John Van Reenen : As I see it, there are four big benefits. The first one can be traced all the way back to David Ricardo in the early 1800s. It allows countries to specialise in producing what they do best. For instance, the French are good at making wine, the British not so good. But the British are good at producing The Economist . Without trade, Britain would have to produce and consume its own its own wine. But with trade, Britain and France can focus on what they do best, with the French exchanging wine for more copies of The Economist . This is sometimes called “comparative advantage”.

As time has gone by, trade is increasingly not just about exchanges in final goods—newspapers versus wine—but “intermediate” goods. Think of a car. Thousands and thousands of parts go into making a car. Increasingly what has happened is that one part is made in France, another in Germany, another in Japan, and so on. Then they can all be combined in a fourth country like Britain. Even for a complex thing like a car, nations can specialise in what they are good at.

The second benefit of trade is that it makes markets bigger. If you are producing just for one country, your market is quite limited. But with trade, you can also start selling things to customers all over the world. That means that things like spending large amounts of money on research—self-driving vehicles or whatever—looks a lot more viable. The lump-sum costs of such investment are spread out, so we can get more innovation, which is the key to growing national income.

Free trade increases the size of the pie. But it doesn’t mean that everyone is better off. Some get a smaller slice of the pie

The third benefit relates to productivity differences between firms. Some firms are really productive, others are really poorly managed. What happens when you have trade, is that you have much stronger competition. Domestic firms are competing not just with other domestic firms but with firms all over the world. The less-efficient ones face more competition, so they shrink and they exit the market. Or they shape up. And the really innovative firms can expand. So it’s about creative destruction, really—shifting resources from less productive firms to more productive ones.

The final benefit, which economists sometimes forget, relates to politics. With free trade, you come into more contact with foreign companies, new ideas, new people and so on. That’s mutually beneficial. And it is a political force for cooperation. Think of Europe. Since the second world war, those countries have had lower trade barriers, and that period has coincided with an unprecedented period of peace and cooperation.

The Economist : What are the downsides of free trade?

John Van Reenen : There are well-known downsides. The way I like to think about it is that free trade increases the size of the pie. The overall amount of material wellbeing expands. But just because the size of the pie expands, it doesn’t mean that everyone is better off. There are going to be some losers whose slice of the pie is so much smaller that they would have been better off with less trade. However, because the overall size of the pie has got bigger, the government can compensate the losers which can still make everyone better off.

Let’s think about how this might happen. In the 1980s China began opening up to the rest of the world. China was a low-wage country, so it started selling a lot of low-end manufactured goods like clothes. Although that’s a great thing—people can buy cheaper clothes—workers in richer countries who were producing manufactured goods now faced much tougher competition. Workers in Bradford no longer just competed with those in Birmingham, but also those in Beijing. Those workers, especially less skilled ones in those industries, can be very seriously affected.

It’s important to take a longer-term view. The education system needs to make people resilient to shocks

I think economists underestimated the China shock. That may explain why policies to compensate the losers were insufficient—especially in America where the social safety net, such as for health care, is so threadbare. If there had been better policies, there would be much less of a political backlash against trade than we are seeing right now.

The Economist : What can countries do to compensate those people who do lose out?

John Van Reenen : There are lots of different options. The first thing I would emphasise is that you want to grease the wheels of mobility—to make it easier to move from one firm to another, or one industry to another, or one place to another. Putting up barriers to doing that is costly. For instance, planning regulations sometimes make housing in dynamic parts of the country very expensive, which makes it difficult for people in struggling areas to move there.

You also want to help citizens get the skills to move. So-called “active labour market policies” are important here. Scandinavian countries like Denmark do these quite well. Rather than protecting jobs by increasing the costs of downsizing which ends up making employers reluctant to hire, these nations have generous unemployment-benefit systems combined with a lot of help for people who have become unemployed. Retraining is well resourced. Governments also enforce looking for work pretty strongly.

It’s also important to take a longer-term view. Your education system needs to make people resilient to shocks. You want people to be well educated, and you want that education not to be too tightly linked to a particular skill. Having general skills—literacy, numeracy, social skills—is the right idea. So, when people are hit by tough times, they can reskill and move around more easily.

But it is also important to be realistic. Some people, especially older people, are not going to be able to retrain if they were made unemployed by structural economic changes. For these people, there is nothing wrong with a reasonably generous welfare state and direct investment to support communities that are under stress from trade, technology or any other crisis. But remember: thanks to free trade, you can afford that, because the overall size of the pie is bigger.

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The impact of navigation in lumbar spine surgery: a study of historical aspects, current techniques and future directions.

1. Introduction

2. materials and methods, 3.1. historical overview of navigation in lumbar spine surgery, 3.1.1. in the 1980s (the initial concept of surgical navigation), 3.1.2. in the early 1990s (emergence of image-guided surgery), 3.1.3. in the late 1990s (introduction of computer-assisted surgery), 3.1.4. in the early 2000s (advances in 3d navigation systems), 3.1.5. in the 2010s (the integration of navigation with robotic systems), 3.2. current navigation systems, 3.3. steps of applied navigation in lumbar spine surgery, 3.3.1. preoperative planning, 3.3.2. patient positioning and registration, 3.3.3. intraoperative navigation, 3.3.4. registration, verification, and adjustment, 3.3.5. navigated instruments, 3.3.6. postoperative assessment, 3.4. the role of navigation systems in lumbar spine surgery and their effectiveness, 3.4.1. role of navigation in lumbar pedicle screw placement, 3.4.2. role of navigation in lumbar interbody implant placement, 3.4.3. role of navigation in minimally invasive lumbar decompression, 3.4.4. role of navigation in lumbar spinal tumors and other cystic lesions, 3.4.5. role of navigation in spinal osteotomy and deformity correction, 3.4.6. role of navigation in lumbar spine fractures and spinal spondylolisthesis, 4. discussion, 4.1. advantages of navigation in spine surgery, 4.2. disadvantages of navigation in spine surgery.

High Cost: The initial investment in navigation systems is substantial, which can be a barrier for many healthcare facilities, especially those in resource-limited settings. Maintenance and updates also add to the cost [ 100 ]. The economic burden extends to training personnel and integrating these systems into existing workflows [ 101 ]. Despite advancements in the field of navigated spine surgery over the past two decades and the widespread availability of navigation systems, a mere 9% of surgeons consistently employ these systems [ 1 ].
Learning Curve: Surgeons and operating room staff need to undergo extensive training to become proficient in using navigation systems. The learning curve can initially lead to longer operative times and increased complexity in case management [ 102 ]. Proficiency requires consistent use and practice, which can be challenging in low-volume centers [ 103 ]. The surgeons reported that their first experience did not comply with their expectations. As they progressed along the learning curve, the team identified several critical factors for success, such as the optimal camera position, reference frame attachment location and orientation, recognition of possible causes of errors that the system possesses, and proper steps in the surgical workflow [ 34 ]. As they became competent with these parameters, their ability to efficiently place screws significantly improved.

4.3. Future of Navigation in Spine Surgery

4.4. strengths and limitations, 5. conclusions, author contributions, institutional review board statement, informed consent statement, data availability statement, conflicts of interest.

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Click here to enlarge figure

Year	Trend
1980s	Early CAS concepts	Initial ideas for computer-assisted surgery
1995	Image-guided surgery	First use in spine surgery with preoperative imaging
1999	Intraoperative imaging	Intraoperative use of CT scans, fluoroscopy, and ultrasonography
2000–2005	Optical tracking	Real-time instrument tracking systems
2006	Intraoperative 3D imaging	Registration fee
2010	Advanced navigation	Robotic assistance in 3D imaging
2011	Augmented reality (AR)	Spatial orientation improved
2015	Robotic assistance	Improved precision of procedures
2018	Artificial intelligence (AI)	Integrated image processing
2020	Mixed reality	To enable immersive planning and guidance

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Heydar, A.M.; Tanaka, M.; Prabhu, S.P.; Komatsubara, T.; Arataki, S.; Yashiro, S.; Kanamaru, A.; Nanba, K.; Xiang, H.; Hieu, H.K. The Impact of Navigation in Lumbar Spine Surgery: A Study of Historical Aspects, Current Techniques and Future Directions. J. Clin. Med. 2024 , 13 , 4663. https://doi.org/10.3390/jcm13164663

Heydar AM, Tanaka M, Prabhu SP, Komatsubara T, Arataki S, Yashiro S, Kanamaru A, Nanba K, Xiang H, Hieu HK. The Impact of Navigation in Lumbar Spine Surgery: A Study of Historical Aspects, Current Techniques and Future Directions. Journal of Clinical Medicine . 2024; 13(16):4663. https://doi.org/10.3390/jcm13164663

Heydar, Ahmed Majid, Masato Tanaka, Shrinivas P. Prabhu, Tadashi Komatsubara, Shinya Arataki, Shogo Yashiro, Akihiro Kanamaru, Kazumasa Nanba, Hongfei Xiang, and Huynh Kim Hieu. 2024. "The Impact of Navigation in Lumbar Spine Surgery: A Study of Historical Aspects, Current Techniques and Future Directions" Journal of Clinical Medicine 13, no. 16: 4663. https://doi.org/10.3390/jcm13164663

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Free Trade: Advantages and Disadvantages | Essay

Published Date: 24 Nov 2017

Disclaimer: This essay has been written and submitted by students and is not an example of our work. Please click this link to view samples of our professional work witten by our professional essay writers . Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of EssayCompany.

Lauren Heffernan

Free Trade in the Modern World

Free trade can be described as the trade which occurs when left to its own resources without any restriction placed upon it by the government. Trade barriers though are often used to protect domestic producers from the more competitive international markets. These redirect and lessen trade flows rather than create them.

Benefits of Free Trade

Countries which trade freely can experience a number of benefits and these are felt by both the companies and consumers. They have the potential to greatly improve production in their country as there is now the opportunity to concentrate on the goods where they believe they have an advantage when compared with other areas. In modern times not many people have the time or resources to make their own clothes and grow their own food, these items can be bought with relative ease, it has always made more sense when thinking economically to acquire certain items from the people who have the talent and skills to specialise in their making. There is then a mutual benefit between two countries as they are each more efficient at producing their favoured item and can import those items they are less skilled at. A firm which produces in a country that trades internationally has a larger market to work with. They have more consumers who are able to buy their goods and services, this also them to grow. With this expansion they have the new asset of being able to take advantage of economies of scale. They can improve their efficiency in production through this and may end up with falling costs and higher productivity. As the firm is now competing with other companies on an international level they must try to be more efficient with their resources so they can lower prices and be more competitive. As the firm becomes more and more efficient they have the ability to product more goods and services therefore expanding their business even more. As the try to compete with a larger market, firms may also need to become more innovative, they must come up with new and better ideas so they can keep their place in the market secure. [1] Better, faster, cheaper products must be developed as companies fight to hold their market share. We can see this in the recent competition to produce the newest most high quality laptop at the lowest cost. Free trade encourage ideas and knowledge to move between countries, new firms can take note of the failures of older firms, use this knowledge to their advantage and so become more efficient. [2]

As the domestic firms benefit so does the consumer. Firms must become more innovative and also may have to try and lower prices so they can keep their customers happy in the larger market. As firms cut their costs to maintain competitiveness they must become as efficient as they can, this could lead to more effective distribution of goods and more informative advertisements all to the benefit of the consumer. Firms must keep on improving themselves so they can keep up with the leaders, either that or create their own niche area but either way the consumer benefits. As the countries trade expands to international levels consumers have a larger variety of goods and services to choose from. Along with these advantages there is also less fear of the consumer being taken advantage of my monopolies, they can no longer charge extravagant prices as there is less chance they actually hold monopoly over something in the larger international market. And the issue of employment cannot be ignored. People who work for companies involved in international trade often have better prospects. In 2008 international trade was seen to have generated around one fifth of the total employment of the world, around 605 million jobs. [3] This fact is further backed up by the claim that trade barriers hinder employment. This can be seen when trade barriers are set up, their purpose is to protect jobs at home but they ultimately just make domestic products more expensive for consumers, when this occurs fewer goods are sold and there is the possibility that jobs will be lost. [4] Trade has been named one of the largest contributors to economic growth since the mid 20 th century due to its enticements for efficiency and lowered prices. [5] Due to this there is an increase in living standards experience by all involved, real income may rise and with this the economy expands. [6]

Main Obstacles for Free Trade

The government has the power to restrict the flow of goods and services. This can be done through something called a tariff which is the most common and is a tax on imports [7] . When a tariff is added to an imported good it raises the price of this good when compared to the domestic equivalent. The government also has the power to give a subsidy to a specific domestic industry, allowing them to produce goods and sell them at a cheaper price. These restrictions both exist so that imported goods from foreign countries are more expensive when compared to goods made at home and are used to protect the domestic industry. [8] Domestic industries may sometimes need protection from the increased competition they face when working within a larger international market, as when put under pressure these firms may be forced to fire employees to cut costs or even completely move their production to another country and all of this would result in higher unemployment. This form of “protection” is especially needed in the case of infant industries. In a situation where the government wishes to help a new industry develop it will place tariffs on possible substitutable imported goods, this allows the infant industry to grow. This allows a country to grow its own domestic market and strengthen its industries without them being extinguished due to more competitively prices imported goods. “Protection” has been criticized though as industries that grow in a situation without competition it may produce lower quality goods, also subsidies have the power to lesson economic growth.

There are also other kinds of barriers. A license is one for example this is something that is given to a firm, giving them permission to bring specific goods into a country. As only certain firms are given licenses this decreases the amount of a good that can be imported and so curbs competition at the expense of the consumer as prices can easily be raised in a less competitive environment. A quota is definitely another barrier used by the government in this context. This is a constraint on the actual physical amount of goods that are allowed to be brought into the country. Also found within the same bracket as the license and quota is the Local Content Requirement. This is a stipulation made by the government which means that a specific percentage of goods sold must be made domestically. It can be a restraint on the amount or its value.

As you can see in the diagram above, where there is a tariff place on an imported good, domestic producers benefit at the expense of domestic consumers and foreign producers. The green triangles represent the efficiency lost as that is consumer surplus abandoned after the tariff. The yellow rectangle is the revenue gained by the government due to the tariff. [9] Many barriers end up raising the price of some items in relation to others which means that they are generally “pro-producer and anti-consumer”. With higher prices, it can be seen in the short-run, that less imported products are bought, domestic firms will gain a larger profit from this. As many of these barriers are tax related the government will also experience a boost in revenue. This seems like the best possible outcome but if you look at the long-run situation it is not as positive. As time goes on, firms become lax with their efficiency as they have no real competition, they have higher prices and worse quality items which is the perfect environment for new substitutes to develop. As more substitutes are brought into the market, the old firms experience a loss in sales. Also, the government may have to shell out money for better public services, as the population would have less disposable income due to higher prices. [10]

How these Obstacles are used in the EU

The initiation of European economic integration was intended to create a Single European Market by 1993. The euro was introduced in 1999, it was thought that this single currency would help with trade integration by abolishing the ambiguity associated with exchange rates and there would be improved transparency and competition between countries. There have been many barriers between countries which has impeded trade. Along with tariffs and such as mentioned before, there is also a significant use of technical barriers. But it seems most countries accept their usage as the cost of them outweighs the price of being left outside of the euro. Technical barriers create obstacles to trade by crating regulations that restricts on the sale of goods, they do this by requiring the product to have certain characteristic or to have gone through a specific production process, for example a certain package size for food products. Technical barrier are becoming more and more noticeable and are one of the main worries faced by the World Trade Organization. This institution has been trying to make sure that “… technical regulations and standards, including packaging, marking and labelling requirements [...] do not create unnecessary obstacles to international trade.” But even with this fear of a more obstacle-ridden trading system it still seems to be apparent that technical barriers are in use throughout the EU and pose significant costs to the member countries. [11]

The goal of the European Union now is to open new markets and to have better trading systems around the globe. To do this they have a variety of policies whose primary function is to lessen and even eliminate barriers to trade between member states and those countries outside the EU. To do this there must be trust and transparency between countries as it involves negotiations focused on the removal of certain “protections”. The Union does understand that not all barriers can be removed, as intellectual property in innovative output must be preserved. So there are no disputes between countries the EU monitors all Protectionism occurring in the world, they do this so as to prevent disputes which could result in trade restrictions. The EU publishes a report every year, this report contains information on the trade and investment barriers used throughout the year. It describes the progress they have achieved in taking down barriers between the six strategic partners which include China, India, Japan, Brazil, Russia and the US. [12]

Example of a Trade Dispute between the EU and another Nation

An example of a trade dispute between the EU and another Nation is that of the banana trade dispute. This has been one of the longest running seen in the trading system since World War II. The main issue of contention in this situation was the preference the EU was seen to be showing towards the import of African, Caribbean and Pacific bananas over those from Latin America.

The conflict began in the early 1990s when the EU wished to begin using a new import regimen and it was thought that this would discriminate against Central American countries. Five main countries were involved, these were Columbia, Costa Rica, Guatemala, Nicaragua and Venezuala. These countries tried to get a consultation with the EU but when this failed they began informal negotiations to find a solution. They argued that the new regime would violate 20% maximum tariff on bananas agreed upon by the EU in 1961. To settle this dispute a panel was put together, they looked at all the evidence and ultimately decided that the new regime would violate a few GATT provisions and could not be justified. The EU then went back to the drawing board and two years later came back with a new and improved regime. The same Latin American countries requested another panel examination and once again they came to the conclusion that it was not to be allowed.

In 1996, five years after the beginning of the dispute, a new complaint was filed against the EU. Ecuador, Guatemala, Honduras, Mexico and the US were all unhappy with the EU’s follow-through after the panal reports. They argued that the EU’S import regime was still discriminatory towards Latin American bananas, this was to be dealt with within the World Trade Organization’s trade dispute system. The Latin American countries once again won the dispute as the WTO decided that the regime was inconsistent with their rules.

The EU lost on the basis of the rule of non-discriminatory administration of quotes, and it was also found that the most favoured nation rule was being broken by the EU’s licensing procedures. The US and Ecuador were then given permission by the World Trade Organization to impose sanctions on the imports they received into their countries from the EU. Finally in 2001 the three countries at the heart of the dispute settled on an agreement. Under the condition that the EU changed its current import regime to a tariff-only system, Ecuador and the US would remove their sanctions. This would mean that there would no longer be a country-specific tariff quota share. The EU began negotiating with all countries from which they imported bananas, to reach agreements on the new system. During 2005 the EU proposed a number of new tariffs all which were ultimately rejected as they would not sustain the existing market for banana suppliers in Latin America. As time went on Latin American lost confidence in their agreement with the EU and made this concern clear, new complaints were filed in 2007. In mid 2008, several Minister met in Geneva discuss various agricultural issue, they also tried to reach a conclusive agreement on the banana dispute but no such deal was reached. [13]

Finally in 2009, nearly two decades after the beginning of the dispute, the four countries reached a conclusive agreement. This occurred when representatives from the EU, US, former EU colonies and the Latin America met once again in Geneva. The EU agreed to reduce its tariffs on bananas from Latin American from €176 per ton to €114 a ton in 2017, and in return the Latin American countries would drop their case. The WTO Director-General Pascal Lamy described this as the end of "one of the most technically complex, politically sensitive and commercially meaningful legal disputes ever brought to the WTO." Former colonies of the EU would stand to lose money in this situation, around $40 million a year because a portion of the EU banana imports would be coming from Latin America rather than them. But they would still remain receiving basically tariff-free access and also would get a payment of €200 million. [14]

The benefits to trade can clearly be seen in the modern market. Due to international trade countries can benefit from the availability of a larger consumer market, economies of scale and the presence of competition which encourages the lowering of prices and increased production. This leads to increased employment for all countries involved. Though some countries try to protect themselves and their infant industries through tariffs and subsidies it is obvious that the benefits of international trade far surpass the risks.

www.wto.org
www.economicshelp.org
www.hsc.csu.edu.au
www.heritage.org
www.infoplease.com
www.econlib.org
www.investopedia.com
www2.warwick.ac.uk
ec.europa.eu
online.wsj.com
welkerswikinomics.com
www.wiod.org

[1] http://www.economicshelp.org/trade/benefits_free_trade/

[2] http://www.heritage.org/research/reports/2000/08/the-benefits-of-free-trade-a-guide-for-policymakers

[3] http://www.wiod.org/conferences/brussels/IPTS_background.pdf

[4] http://www.wto.org/english/thewto_e/whatis_e/10ben_e/10b07_e.htm

[5] http://www.economicshelp.org/trade/benefits_free_trade/

[6] http://www.hsc.csu.edu.au/economics/global_economy/tut7/Tutorial7.html

[7] http://www.infoplease.com/cig/economics/barriers-international-trade.html

[8] http://www.econlib.org/library/Topics/HighSchool/BarrierstoTrade.html

[9] http://welkerswikinomics.com/blog/2007/10/17/ib-graphing-and-understanding-the-economic-impacts-of-protectionism/

[10] http://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp

[11] http://www2.warwick.ac.uk/fac/soc/economics/research/centres/eri/bulletin/2008-09-3/chen-novy/

[12] http://ec.europa.eu/trade/policy/accessing-markets/

[13] http://www.wto.org/english/news_e/pres09_e/pr591_e.htm

[14] http://online.wsj.com/articles/SB126089161812692163

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Free Trade: Advantages and Disadvantages | Economics

Advantages of Free Trade:

(a) International Specialization:

(b) Increase in World Production and World Consumption:

(c) Safeguard against the Advent of Monopolies:

(d) Links with Other Countries:

(e) Higher Earnings of the Factors of Production:

(f) Benefits to Consumers:

(g) Higher Efficiency and Optimum Utilisation of Resources:

(h) Evil Effects of Protection:

Disadvantages of Free Trade:

(a) Excessive Dependence:

(b) Obstacles to the Development of Home Industries:

(c) Empire-Builder:

(d) Import of Expensive Harmful Goods:

(e) Rivalry and Friction:

Pros and Cons of Free Trade Agreements

Advantages of Free Trade Agreements

Key Takeaways

Increased Economic Growth

More Dynamic Business Climate

Lower Government Spending

Industry Expertise

Technology Transfer

Increased Job Outsourcing

Theft of Intellectual Property

Crowding Out Domestic Industries

Poor Working Conditions

Reduced Tax Revenue

Degradation of Natural Resources

What was the purpose of NAFTA?

What is the difference between free trade and fair trade?

Pros and Cons of Free Trade

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