Free Trade Economics
In the world of economics, trade is simply defined as the voluntary exchange of goods and services. Free trade is a concept that allows nations to trade with minimal restrictions. The essence of free trade is to allow countries to focus on utilizing their resources to full capacity to manufacture products that benefit both local and foreign markets. When nations exchange goods and services, their economies address product shortages and satisfy consumer needs.
Often known as the Laissez-faire approach, trade liberalization is the heart of globalization. Trade liberalization refers to the elimination or the reduction of trade barriers between nations to allow smooth exchange of goods and services. Governments support open markets to allow exchange of goods and skilled labor among consenting countries. An open market is a trade environment devoid of economic barriers.
The desire to develop open markets initiates the need for a free trade agreement. A free trade agreement (FTA) is a contract between countries to minimize restrictions on imports and exports. Trade restrictions include import tariffs, export quotas, government subsidies and trade bans on specific goods. A free trade policy is enforced when there is a written contract or a verbal agreement between two or more countries. When governments adopt the Laissez-faire approach, they leave to trade to flow naturally with minimal interference. However, when trading activities threaten crucial aspect of the economy and the society, a government may partially enforce its protectionist policies.
Protectionism is the practice of protecting local industries by imposing taxes on imports to minimize foreign competition. Protectionism often results to trade wars. A trade war is the deliberate enforcement of trade restrictions to impair importation from other countries.
The rise of globalization has required countries with mutual interests to come together and form a free trade area (FTA). In a free trade area, countries can formulate contracts and laws to govern their trading practices.
Free trade theories
Economists hold varied opinions on the perceived impact of free trade on the economy. Their opinions are summarized by two major theories: Comparative Advantage and Mercantilism.
The Comparative Advantage theory states that when nations agree to participate in free trade
, they mutually benefit through the reduced operational costs. Comparative advantage works on the mantra that a country benefits more by working on its economic strongholds using the available resources. Economists favoring this theory argue that countries have economic strengths and weaknesses. Where one country is deficient, the other country shows abundance. When the two countries trade, there exchange highly needed goods and services hence forming a mutually symbiotic relationship.
Mercantilism theory argues that a country generates maximum revenue by exporting goods to other countries. Mercantilism works by ensuring the value of exports to other countries exceeds the value of imports coming into the country. To achieve this goal, a country levies high fees and taxes on imports. Economists in support of this theory believe that a country’s economy will only be stronger if other countries buy more of its products than the quantity of products it is required to import. That way, a country compensates the value of imports from a section of its exports.
Benefits of free trade
- Promotes product diversity. Countries gain access to products that they lack within their boundaries.
- Reduces prices of goods and services. Countries having a surplus of products tend to sell their goods at lower prices to foreign markets. In so doing, consumers benefit from lowered prices of goods and services.
- Allows local producers to gain access to external markets. In a country where a majority of the population trades in one product, the market for the product becomes limited. But by exporting, the local producers get a wide audience for their products.
- Exchange of skilled labor and technologies. Free trade triggers migration of skilled labor to areas where skilled expertise is required. Additionally, countries gain access to new and innovative technologies that improve the quality of products, enhance communication and transport of goods and services.
- Curbs monopoly of local industries. Free trade forces local company owners to reinvent their business strategies to suit consumer needs and remain relevant in the market.
- Allows countries to benefit from excess natural resources by exporting to other countries.
- Stimulates economic growth by creating a dynamic business climate. Investors can invest in foreign currencies, stocks and securities.
- Reduces government expenditure from the removal of export quotas. The funds that would have been used to cushion local industries are channeled to other worthy causes.
The limitations of free trade
- Reduces the market for local products due to cheap imports.
- The influx of foreign labor creates competition in the job market.
- Bulk manufacturing of products gets outsourced to countries offering cheap labor hence causing unfair competition.
- Encourages sub-standard working environments in countries having poor labor and environmental laws.
- There are high chances of people and entities infringing the intellectual property rights. Patent wars emerge as some economic players disregard patent laws.
- Countries run the risk of overexploitation of natural resources to feed external markets. Overexploitation of natural resources and careless disposal of waste material cause massive environmental pollution.
- Free trade promotes globalization, a concept that encourages culture degradation. Culture erosion arises from the adoption of new products and lifestyle. Additionally, citizens who lose their jobs as a result of unfair market competition, resort to criminal activities for survival.
The future of free trade
Free trade is a concept driven by the noble mission of improving the economy of countries. On a large scale, free trade yields ample benefits to countries having free trade agreements. To mitigate the challenges that arise from free trade, it is imperative for nations to identify trade limits. In this context, trade limits refer to the capping of imports for products that can be conveniently manufactured within the country. This is a move meant to protect local industries from extinction as a result of stiff foreign competition in the market.
The establishment and enforcement of labor and environmental laws serve to protect citizens from labor exploitation and environmental pollution respectively. Developing countries strive to keep up with the demand of products and may require laws to protect their natural resource and human labor. The free trade policy is a sound economic obligation for countries in pursuit of economic growth.