Benefits of Free Trade

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 business terms are all about. We don't pay attention to these terms as we believe that we are immune from the effects of these policies. What we don't understand is the fact that even though these policies don't affect us directly, they do affect us indirectly on a long term basis.

Simply put, these policies are directed at economic growth and economic growth is closely related with 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 keep quiet. On the contrary, understanding concepts like free trade and its 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 system of 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 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 which give one party an unfair advantage over the other. In a 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 free trade zones in the United States are referred to as Foreign Trade Zones - an area in the vicinity of a US port which is exempted from Custom restrictions.

Free Trade Benefits

Everything has its pros and cons, and 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 don't seem to be impressed by these arguments. Given below is a list of benefits of free trade zones in the economy owing to which this trade policy has garnered so much support all over the world.

• The most prominent benefit is perhaps the fact that reducing trade barriers will result in a boost in international trade.
• Other than international trade, free trade also boosts business competition, and such healthy competition will make traders put in more efforts to perform well.
• Other than improving the quality of products, the competition in free trade will also bring down the price of goods and turn out to be beneficial for the consumers.
• For consumers, free trade will also mean freedom of choice as they will have more options to choose from.
• The traders will be benefited by the fact that they will have a larger market at the disposal, owing to which they will be able to sell more goods.
• It gives all the nations a comparative advantage - wherein countries only produce those goods in which they are specialized and export them, while importing other goods from rest of the countries.
• It results in proper allocation of resources - wherein a country with some products in excess can trade the same with products in which they have a deficit.
• It also triggers efficient production, as producers pitch for effective use of available raw material.
• Free trade will also help in doing away with the protectionist government policies which are believed to be a heaven for corrupt politicians and bureaucrats.
• The economic growth brought about by free trade tends to create more jobs, more jobs result in more expenditure, more expenditure results in more demand and more demand results in more production - which again result in creation of more jobs - in short free trade has the tendency to set 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 towards its disadvantages. Some of the most prominent disadvantages of free trade include 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 of free trade 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.