Free trade occurs when the government removes all the economic barriers to trade so that goods and services flow freely between two or more countries. In other words, the government doers not apply restrictive policies such as quotas and tariff on imports or the provision of subsidies on exports.
Free trade significantly adds value to the economy through various ways. First and foremost, free trade helps in stimulating production in an economy. The greatest strength of international trade lies in its ability to enable countries and firms to engage in production activities in which it has the comparative advantage. According to UNEP report, free trade guarantees the availability of basic material and allows the citizens of a country to have a wide range of goods and services. Because free trade expands the market for goods and services, firms within a country are able to specialize in production activities that give a comparative advantage. Hamilton noted that opening up the boarders between US and Mexico would help in expanding and making the Mexican trucking fleet more efficient over other firms (5). Firms are therefore given the opportunity to reduce their opportunity costs which in turn leads to the generation of maximum returns. It is believed that the growth rate of the US economy over the past decade by two digits (about 23% per year) has been brought about by free trade.
Free trade promotes competition among traders and business entities which in turn brings a lot of benefits to the consumer. Because of free trade and intense completion, firms are usually forced to improve their services by reducing prices and increasing the quality of their commodities in the market. Citizens of a country are therefore supplied with high quality but cheap vehicles, foodstuff and medicine. This often leads to improved living standards of a country’s citizens.
Free trade promotes innovation and the use of modern technological advancement in production. Because of the high competition posed by the existence of open markets, firms are often faced with the dilemma of having pressing down costs, providing low prices and at the same time maintaining or improving on the quality of goods and services. However, Bakker and Chapple argues that liberalization leads to financial deepening through increased competition and innovation (38).This further promotes the use of modern technology in production, distribution and marketing of their goods and services, which in turn leads to the development of new and cheaper methods of production and distribution.
Free trade helps in promoting economic freedom and helps in increasing employment opportunities. This is because as a country operates at optimal productive levels, their scale of operation expands leading to the expansion of employment opportunities for the citizens. Free trade also promotes the concept of democracy and the rule of law because companies that operate across the borders of different countries are more likely to obey the international code of conduct and the rule of law. In addition, opening up the borders of a country allows the citizens of a country to freely seek for employment opportunities across their borders. Furthermore, free trade helps in creating international peace and harmony which is an essential requirement for international coexistence and trade.
However, opponents of free trade argue that free trade works only to redistribute the existing wealth rather than creating new forms of wealth. Sharpe notes that in an uncertain world, with redistribution, one can increase one’s slice of the pie more easily by appropriating someone else’s than by helping to make a bigger pie (109).For instance, some economists believe that the benefits that some countries reap by engaging in free trade are far much less compared to the costs involved in sustaining free trade. One of the greatest evils of free trade is its tendency top encourage dumping. Dumping of cheap inferior goods into a country’s economy has the effect of discouraging domestic investors because of unfair competition. Consequently, it is believed that dumping may cost a country a lot of money than the benefits that it reaps from free trade. In addition, dumping has some indirect costs. For instance, the distribution of substandard medicine and food stuff may have dire health implications in the citizens of a country.
Some countries also argue that free trade discourages the growth of domestic industries. Burnnet et al notes that Africa as a continent has lost more than $270 billion as result of trade liberalization (17). It is argued that sometimes infant domestic industries need economic incentives and protectionist policies in order to spur their growth and to protect them from foreign firms that may have ‘ill economic’ intentions of exploiting the domestic economy. Because of high factor costs in developing countries and use of poor technologies, developing nations argue that foreign firms are often an edge ahead of their counterparts in the developing economies with regard to management of production costs. Bouet reports that reducing tariffs brings greater gains in some countries compared to others (82).Therefore, in the absence of protectionist policies firms in the developing nations would be forced to shut down, hurting the domestic economy in the process.
Although free trade promotes negative trade practices such as dumping and encourages unfair trade competition that may hurt infant industries of a country, unrestricted trade offers numerous benefits to the countries involved. Such benefits ranges from high productivity of the economy because of specialization and the application of the concept of comparative advantage, expanded market for domestic goods and services, the creation of more jobs and the development of research, innovation and technology. Countries should therefore embrace free trade agreements but exercise a small degree of control that is sufficient to protect infant domestic industries and check negative practices such as dumping.