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 other legislation, such as tariff and non-tariff trade barriers.
The theory is that any voluntary trade must benefit both parties, otherwise it would not be made. More precisely, for a trade to occur both parties must expect a benefit (ex ante.) Furthermore, the advantages of free trade according to classic economic theory are substantiated in Ricardo’s comparative advantage analysis, according with which free trade achieves maximum economic efficiency and overall productivity gains.
Free Trade can be contrasted with protectionism, which is the economic policy of restraining trade between nations, through methods such as high tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over or competition.
Governments often call managed international trade agreements "free trade", and although this is not really free trade, such treaties may result in freer trade.
Free trade is a term in economics and government that includes:
- Trade of goods without taxes (including tariffs) or other trade barriers (e.g., quotas on imports or subsidies for producers)
- Trade in services without taxes or other trade barriers
- The absence of trade-distorting policies (such as taxes, subsidies, regulations or laws) that give some firms, households or factors of production an advantage over others
- Free access to markets
- Free access to market information
- Inability of firms to distort markets through government-imposed monopoly or oligopoly power
- The free movement of labor between and within countries
- The free movement of capital between and within countries
One criticism of free trade is that such trade may be cut of during wars or blockades/embargoes. Thus depriving a country of various needed products if they are not produced in the country. Examples includes weapons, fuel, and even food. This may cause devastating effects. For example, see The World Wars and mass starvation.
Free trade is argued to prevent wars, but this is arguably assumes rather specific conditions, such as both sides being severely harmed due to lack of free trade caused by the war. In practice, one side is often harmed much more than the other side, one side may able to blockade to other side while itself continuing to trade with the rest of the world, and so on. If a country is severely dependent on external trade, then it risks being forced to submit to an enemy due to a trade blockade alone. Furthermore, numerous civil wars have occurred in countries having free trade within the country.
Even in peacetime, if a country cannot produce products themselves, then they are dependent on friendly relations with other countries that can produce such products. For example, countries producing weapons for export restrict such export to friendly countries. During the Cold War, NATO had extensive programs aimed at preventing weapons and advanced technology in general from being exported to the Communist countries.
Countries that have built up indigenous industries, like East Asian countries, have often used various forms of protectionism in order to do so.
Free trade may cause effects such as foreign products being bought with by increased debt or reduced assets, meaning increased consumption of foreign products without increased domestic production, and with this to be paid for in the future.
Free trade may cause offshoring, beneficial for the countries to which industries are moved to, and in particular beneficial for the owners of the industries moved, but not the countries losing industries.
Extensive transportation over long distances of products is often an effect of free trade, possibly causing negative environmental effects compared to locally produced and consumed products.
Free trade advocates tend to assume that different countries will specialize in different kinds of industries. In reality, there may be various forms of synergy, meaning all kinds of industry tending to localize to the same place under free trade, with other places only producing raw materials.
Average country IQ and other "biological" variables are often ignored due to political correctness, but they may have various effects on trade arguments, such as more advanced industries and development being unlikely to occur in low average IQ countries, especially if facing competition from high IQ countries due to free trade. On the other hand, if such countries use protectionism to build up industries, then the quality of the resulting products may be low.
Free trade may cause various "race to the bottom" effects, such as regarding wages, taxes, environmental regulations, and so on.
Free trade is supposed to have reduced global poverty. However, any such reduction likely to a large degree reflect general technological progress. Furthermore, most reduction of poverty has occurred in China which has had extensive protectionist policies, close co-ordination between the government and the private sector in order to advance Chinese interests, demands that foreign companies must transfer technology in exchange for access to the Chinese market, and large scale theft of foreign technologies (the head of NSA has described (Chinese) cyber espionage as the "greatest transfer of wealth in history".)
If excluding China, then global poverty has been argued to have increased worldwide since 1981, and, according to some measures, to have increased since 1981 even if including China (due to a larger increase of poverty in non-Chinese areas than the decrease of poverty in China).
- NSA Chief: Cybercrime constitutes the “greatest transfer of wealth in history” https://foreignpolicy.com/2012/07/09/nsa-chief-cybercrime-constitutes-the-greatest-transfer-of-wealth-in-history/
- Exposing the great 'poverty reduction' lie http://www.aljazeera.com/indepth/opinion/2014/08/exposing-great-poverty-reductio-201481211590729809.html