What is Free Trade? – Advantages, Disadvantages, Types, Work, and More
What is Free Trade?
Free trade advocates that agents have the most economic liberty so that they can trade both inside and outside the country without obstacles. In the internal sphere, this economic freedom encompasses several freedoms: freedom of prices, schedules, hiring, etc. On the other hand, in the foreign sphere, it constitutes free trade, that is, the opposition to protectionism.
For free trade to be effectual, there must a system that ensures compliance with agreements between private parties and defends the basic rights of consumers and businesses. In this way, the State has a role as a guarantor of the legal system and as a negotiator with other countries that share its principles and desire to trade.
It is value mentioning that economic liberalism is the trend of financial thought that promotes free trade as the best way to achieve economic development through taking advantage of the comparative advantages of countries, achieving greater economies of scale, promoting creative destruction and suppressing privileges of interest groups protected by some unjustified regulation.
Internal Free Trade
When we refer to free trade within the borders of a country, we say that there is a market economy in the country that promotes free competition between companies for consumer preferences.
In this situation, firms expect to be free to enter or exit the market, and product prices are expected to define by the interaction of supply and demand. The State, for its part, will have a supplementary role acting in situations in which the marketplace fails (competition is not possible or is limit). Thus, the government must function as a guarantor of property rights, consumer rights and compliance with contracts or legal agreements.
Free trade is opposed to state intervention that hinders the exercise of economic activity by agents. Thus, he will oppose measures such as the minimum wage, price controls or excessive regulations. This is a position defended by liberalism.
Characteristics of Internal Free Trade
Amongst the characteristics of internal free trade, the following stand out:
- Free entry and exit of the company.
- Freedom of entrepreneurship.
- Price is determined by the communication between supply and demand.
- Consumers have information and are free to choose between the different providers.
Characteristics of Foreign Free Trade
Among the characteristics of foreign free trade, the following stand out:
- Final goods, and also inputs or capital merchandise, can be freely traded crossways borders.
- Reduced or non-existent tariffs.
- There are no false barriers to trade such as import/export quotas, limits on foreign investment, inability to hire foreign workers, etc.
Advantages and Disadvantages of Free Trade
Advocates of free trade claim that it allows consumers to enjoy a greater variety of products and services at a more affordable price due to the pressure of competition. Likewise, free trade would allow countries to take better advantage of their comparative advantages (resources, knowledge, location, etc.).
Notwithstanding the foregoing, some critics claim that local companies that cannot compete with prices from foreign countries with low labour costs are destroying. Thus, for example, the competition imposes by textiles from China, whose manufacturing cost is much lower than in more develop countries, is often criticise because the latter pay higher wages and have better obligations to their labour (protection against accidents, insurance, vacations, etc.).
Advantages of Free Trade
Advocates of a quarrel that it improves the quality of life for everybody. They are mainly based on the fact that it allows the appearance of economies of scale and the growing specialization of each agent, which increases efficiency and productivity.
Allowing anyone to access economic activity under the conditions they want, allows more buyers and sellers to appear. Thus, through competition, the quality of life will improve by benefiting from low prices and the need to innovate driven by competition between companies.
The facility to participate in the market also allows the offer to adapt more exactly to the demand since regulations that prevent offering in certain conditions do not have to follow.
Disadvantages of Free Trade
The main argument against free trade is that, in the absence of regulation, those with more power will be able to abuse those with less, imposing their conditions on the exchanges. Some examples are big companies eliminating the rivalry or companies offering poor conditions to their employees.
Therefore, certain measures propose to balance the power between both parties, such as the minimum wage, competition protection laws or quality regulations. By intervening in the market, the aim is for it to develop in a fairer manner and without abuse of power.
What is a Free Trade Agreement?
A free trade agreement is an agreement between two or more countries to reduce barriers to imports and exports between them. In a policy, goods and services can buy and sell across. An international border with little or no government tariffs, quotas, subsidies, or prohibitions.
How does a Free Trade Agreement Work?
In the modern world, the policy is usually implement through a formal and mutual agreement between the nations involved. However, a free trade policy may just be the absence of limits on trade. Thus, trade agreements are important commercially/economically and also politically.
Main characteristics of a Free Trade Agreement:
Free trade allows the clear import and export of goods and services between two or extra countries.
Trade agreements are of three types: unilateral, bilateral and multilateral.
The WTO helps negotiate global trade agreements.
Types of FreeTrade
Trade agreements are usually unilateral, bilateral or multilateral. Below, understand each of them.
Unilateral Trade Agreements
They occur when one country imposes trade restrictions and no other country does the same. A country can also unilaterally reduce trade restrictions. This rarely happens because it would put the country at a competitive disadvantage.
Bilateral Trade Agreements
Bilateral agreements involve two countries. Together countries agree to decrease trade restrictions to expand business opportunities between them. The critical point often revolves around the industries protected or subsidized by the government. In most countries, they are found in the automotive, oil, or food production industries.
Multilateral Trade Agreements
These agreements between three or more countries are the hardest to talk about. The greater the number of participants, the more difficult the negotiations will be. Therefore, they are more complex than bilateral agreements because each country has its own needs and requests. However, once negotiate, multilateral agreements are very powerful. They cover a larger geographical area, giving signatories a greater competitive advantage.
The concept refers to the exchange of commercial products between different countries. Its main objective is to promote the absolute commercialization of the product without limitations or restrictions. It is based on government regulations, customs, taxes or quotas.
Organizations such as the WTO (World Trade Organization), regulate trade agreements signed by countries. Free Trade not only helps link economies but also fuels their growth.
The countries that make up the zone commit to ensuring that the prices of the products that trade between these nations are the same for all; which refers to the fact that a country cannot increase the price of goods produced elsewhere.