What is free trade?
Free trade is trade without imposition of limitations by governments. There are no tariffs, embargo, quota and other types of restrictions in international trade. Goods are allowed to freely move across national boundaries.
Advantages of free trade
Promotes international competition
Allowing foreign goods into the country promotes competition. This forces domestic businesses to be efficient in the use of resources. Consequently, costs and prices drop while the quality of their products increases.
Consumer choice
Consumers will not be deprived of alternative products from foreign suppliers if there is free trade. This means that consumers can enjoy a wide range of products.
Cordial relationship with other countries
Trade protection through the use of tools such as tariffs is usually frowned upon by foreign countries and met with retaliatory measures. This can cause a trade war. Free trade, on the other hand, averts trade wars and bad relationship with other countries.
Encourages countries to specialise
Free trade encourages countries to specialise in the production of goods in which they have a comparative or cost advantage. International specialisation increases output and product quality. A country can then buy what it does not produce from other countries.
Disadvantages of free trade
Dumping
Free trade allows large and well-established foreign firms to sell their products at prices lower than domestic firms’ costs of production. Usually, they have a lower cost due to economies of scale. Dumping stifles domestic businesses.
Newly established firms are not allowed to mature
Free trade does not provide newly created domestic firms with the opportunity to grow. These new businesses do not have the capacity to compete favourably with the big foreign firms. Consequently, they are not given enough time to develop competencies to compete effectively in the market.
Unemployment
Free trade may cause the collapse of domestic firms, thereby causing the loss of domestic jobs. It stifles domestic firms and makes them shut down.
Essential industries are not protected
Essential industries are not protected if there is free trade. These industries may be in agriculture, oil, steel, defence, etc. The agricultural industry, for example, may collapse due to overexposure to foreign competition. There may be famine and hunger if the country it depends on has a problem, such as a natural disaster.
Importation of dangerous goods
Free trade may cause the importation of dangerous products like drugs and alcohol. These products can cause health problems and excessive pressure on the healthcare system.