Free trade is an economic approach that defends the elimination of obstacles to the economic activity of agents. In the interior of the country, it translates into freedom of business with a free market, and abroad, in free trade.
Free trade advocates that agents have the greatest economic freedom, so that they can trade both inside and outside the country without obstacles. In the domestic 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, opposition to protectionism.
For free trade to be effective, there must be a system that ensures compliance with agreements between private parties and defends the basic rights of consumers and companies. In this way, the State has the role of guarantor of the legal system and negotiator with other countries that share its principles and desire to trade.
It is worth mentioning that economic liberalism is the trend of economic 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 the privileges of interest groups protected by some unjustified regulation.
Free internal trade
When we refer to free trade within the borders of a country, we say that in the country there is a market economy that promotes free competition between companies for consumer preferences.
In this situation, it is expected that companies are free to enter or exit the market and that the prices of products are defined by the interaction of supply and demand. The State, for its part, will have a subsidiary role, acting in situations in which the market fails (competition is not possible or is limited). Thus, the government must function as guarantor of property rights, consumer rights and compliance with contracts or legal agreements.
Free trade opposes state intervention that hinders the exercise of economic activity by agents. Thus, it will oppose measures such as the minimum wage, price controls or excessive regulations. It is a position defended by liberalism.
Characteristics of internal free trade
Among the characteristics of internal free trade, the following stand out:
- Free entry and exit of the company.
- Freedom of entrepreneurship.
- Price determined by the interaction between supply and demand.
- Consumers have information and are free to choose between the different providers.
Free foreign trade
In the case of foreign free trade, this refers to a situation contrary to protectionism where countries can freely exchange goods and services taking advantage of their comparative advantages.
In order for external free trade to be facilitated, countries tend to sign free trade agreements that generally imply a progressive reduction in tariffs and any other artificial barrier to trade (such as import quotas, bureaucratic barriers, etc.).
Characteristics of free foreign trade
Among the characteristics of free foreign trade, the following stand out:
- Final goods, and also inputs or capital goods, can be freely traded across borders.
- Low or no tariffs.
- There are no artificial barriers to trade such as import / export quotas, limits on foreign investment, impossibility of hiring foreign workers, etc.
Advantages and disadvantages of free trade
Defenders of free trade assure that it allows consumers to enjoy a greater variety of products and services at a more accessible price due to the pressure of competition. Likewise, free trade would allow countries to make better use of their comparative advantages (resources, knowledge, location, etc.).
Notwithstanding the foregoing, there are also critics who claim that local companies that cannot compete with the prices of foreign countries with low labor costs are destroyed. Thus, for example, the competition imposed by textiles from China is often criticized, whose manufacturing cost is much lower than in more developed countries because the latter pay higher wages and have greater obligations to their workers (protection against accidents, insurance, vacations, etc.).
Advantages of free trade
Advocates of free trade argue that it improves the quality of life for everyone. They are based mainly on the fact that it allows the appearance of economies of scale and the increasing specialization of each agent, which increases efficiency and productivity.
By allowing anyone to access economic activity under the conditions they want, free trade allows more suppliers and demanders to appear. Thus, through competition, the quality of life will improve, benefiting from low prices and the need to innovate driven by competition between companies.
The ease of participating in the market also allows the offer to be adapted more exactly to the demand, since regulations that prevent offering under certain conditions must not be followed.
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 exchanges. Some examples are large companies eliminating the competition or companies offering poor conditions to their employees.
Therefore, certain measures are proposed that balance the power between both parties, such as the minimum wage, competition protection laws or quality regulations. With the intervention in the market, the aim is for it to develop more fairly and without abuse of power.
Article written by Paula Nicole Roldán and Mario Husillos.