Essay - Free Trade

FREE TRADE

Free Trade is a market model in which trade in goods and services between or within countries flow unhindered by government-imposed restrictions. Restrictions to trade include taxes and tariffs, and other non-tariff barriers, such as legislation and quotas. Trade liberalization entails reductions to these trade barriers.
There may be different views over the discussion on the topics of its advantages and disadvantages. The one opposing the topics says that it usually benefits the larger, wealthier countries whose big companies are looking to expand and sell their goods abroad, in this way the developing countries, whose small companies could not compete the larger one would have to imports the goods much more than they exports, hence facing the business loss. In this case, the highest level of "Protection" should be maintained.

Advantage of free trade can be illustrated by the following example:

“Two men live alone in an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated and is faster, better, more productive at everything. He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small.
Is it in the interest of either of them to work in isolation? No, specialization and exchange (trade) can benefit both of them.
How should they divide the work? According to comparative, not absolute advantage: the young man must spend more time on the tasks in which he is much better and the old man must concentrate on the tasks in which he is only a little worse. Such an arrangement will increase total production and/or reduce total labor. It will make both of them richer”.



Advantages of free trade
Free Trade occurs when there are no artificial barriers put in place by governments to restrict the flow of goods and services between trading nations.
When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition and redirect, rather than create trade flows.
1. Increased production
Free trade enables the countries to specialize in the production of those commodities in which it had a comparative advantage.
With specialization, countries are able to take advantage of efficiencies generated from economies of scale and increase output.
International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity.

2. Production efficiencies
Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services.
Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods.

3. Benefits to consumers
Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services.
The increased competition ensures goods and services, as well as inputs, is supplied at the lowest prices. For example in Australia imported motor vehicles would cost 25% more if the 1998 tariff levels still applied. Clothing and footwear would also cost around 14% more.
4. Foreign exchange gains
When Australia sells exports overseas it receives hard currency from the countries that buy the goods. This money is then used to pay for imports such as electrical equipment and cars that are produced more cheaply overseas.

5. Employment
Trade liberalization creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold in the competitive environment.
With free trade many jobs have been created in Australia, especially in manufacturing and service industries.

6. Economic growth
The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth.