A concise write-up on the benefits of free trade policy, which are often put forth by its advocates in a bid to promote it.
We often get to hear about terms like free trade and protectionism in context of economic policies, but not many of us actually know what these terms are all about. We don’t pay attention to them, as we believe that we are immune to their effects. What we don’t realize, is the fact that even though these policies don’t affect us directly, indirectly they do have repercussions on our lives.
Simply put, these policies are directed at economic growth, and economic growth is closely related to creation of more jobs―something which is beneficial for us. At the end of the day, we are a part of this economic system, and we are bound to be affected by the same even if we choose to ignore it. On the contrary, understanding concepts like free trade and their benefits for the economy can help us get a better understanding of financial do and don’ts.
What is Free Trade?
In economics, the term ‘free trade’ refers to a trade policy, wherein the traders are allowed to function without any interference on the part of the government. This economic concept is typically characterized by trade of goods and services in the absence of any taxes, trade barriers, or trade distorting policies. While ‘trade barrier’ refers to any government policy which restricts international trade (including import licenses and trade embargo), ‘trade distorting policies’ include taxes, laws, or subsidies, that give one party an unfair advantage over the other. When it comes to free trade, the traders have free access to market as well as market information and there is free movement of labor and capital in between as well as/or within countries.
An area wherein trade barriers are eliminated and trade distorting policies are lowered in a bid to attract new business and foreign investments is known as a ‘free trade zone’. Similarly, a group of countries which has formally agreed to eliminate all the trade barriers on most of the goods and services which are traded between them is known as a ‘free trade area’. While the term ‘free trade zone’ is quite popular in Europe, similar zones in the United States are referred to as Foreign Trade Zones. These are the areas in the vicinity of a U.S. port which are exempted from custom restrictions.
Free Trade Benefits
Everything has its pros and cons; free trade is no exception. While the advocates of free trade policy are of the opinion that its benefits outweigh its disadvantages with ease, critics argue otherwise. Given below is a list of its benefits which have helped the concept garner support all over the world.
❒ The most prominent benefit of reducing trade barriers is that it boosts international trade.
❒ Free trade also boosts business competition, which, in turn, makes traders put in more efforts to perform well.
❒ Such competition improves the quality of products and brings down the price of goods, thus working in the favor of consumers.
❒ For the consumers, free trade also means freedom of choice, as they have more options to choose from.
❒ The traders have a larger market at their disposal, owing to which they can sell more goods.
❒ It gives all the countries a comparative advantage, whereby countries only produce those goods in which they are specialized and export them, and import other goods from other countries.
❒ It facilitates proper allocation of resources, so a country with some products in excess can trade them for products in which they have a deficit.
❒ It also triggers efficient production, as producers resort to effective use of available raw material.
❒ Free trade also helps in doing away with the protectionist government policies which are safe havens for corrupt politicians and bureaucrats.
❒ The economic growth attributed to free trade creates more jobs, more jobs result in more expenditure, more expenditure results in more demand, and more demand will result in more production, which will again result in creation of more jobs. In short, free trade sets the economy rolling.
On the political front, such trade relationship also helps in bridging the gaps between two nations, which makes it an important tool of globalization. While these benefits are tempting, one can’t afford to turn a blind eye to its disadvantages, like structural unemployment as a result of removal of trade barriers, hike in domestic economic instability as a result of dependence on global markets, etc. At the end of the day, one has to weigh these advantages and disadvantages in order to find out which of the two have an edge over the other, and as of today, the advantages of free trade seem to overshadow its disadvantages.