Free trade means eliminating all restrictions in trading between two countries. Some of those restrictions are tariffs or quotas.

Is free trade good or bad?

DEFINITION

Free trade means eliminating all restrictions in trading between two countries. Some of those restrictions are tariffs or quotas.

Imagine that you have a country A and a country B who wish to trade with each other. Country A has plenty of coal and has mastered efficient ways how to produce coal thus making coal price very cheap. Country B only has little coal reserves, and it's extraction method are not as efficient as in country A. Consequently, the price of coal is lower in country A other than country B

If country A wants to export coal to country B it has to pay tariff. Tariffs are kind of a tax. Tariff is calculated on the price or amount of coal. It must be paid by either exporter from country A or importer from country B. Like every tax, tariffs increases the price of product. Therefore, consumers in country A will pay lower price of coal than country B.

Also country B can impose quotas, a restriction on quantity allowed to be imported. For example country A is allowed only to export 10 tones of coal per year, not more. Even if it has plenty coal to export it is not allowed to do it. Low supply of coal in country B rises the price of coal for them.

On the other side, country B produces great and quality wine, which residents of country A absolutely love. They have tried to make exactly same wine, but it's quality simply couldn't match that of country B. But they also have to pay tariffs if they want to export it. At the end price of the same wine would be higher in country A than in country B because of tariffs.

PROS

The most prevalent view by all economists today on free trade is that it is a good thing for both economies, and that it should be eliminated all whatsoever. In the ideal world there should be no tariffs, quotas or any kind of trade restriction. Good should be allowed to freely flow over the border. Why? Lots of economic models have been made to analyze it, and the conclusion is that free trade is good because of comparative advantage and specialization.

Country A is better in producing goal, and country B is better in producing wine. If we reduce tariffs, country A would produce more coal and it would be cheaper for everyone. Country B will produce more wine which will be cheaper for everyone.

Companies in country A which have produced wine would stop to exist because all wine production will move to country B. But all production of coal would move to country A instead.

The final result is that everybody is a winner, both producers and consumers. Consumers get cheaper products, produces have access to bigger market and produce more thus making higher profits. Country A has a competitive advantage in producing coal, but country B has competitive advantage in producing wine.

Also, if we impose too strict trading regulations, we might have problems with illegal activities like smuggling.

The most important model of free trade is David Ricardo's model of competitive advantage.

All trade restriction have been mostly been managed via bilateral agreement between two countries. If countries were in good terms they would agree on lowering tariffs or removing them all completely. In the last half of 20th century multilateral trade agreements have started to become more prevalent. (one of the most important one is NAFTA). NAFTA model is now copied everywhere else in the world.

Also we have a WTO (World Trade Organization) which promotes free trade in the whole world.

CONS

However, with rise of globalization, there is a rising criticism of free trade. Companies are looking for cheaper resources around the world, thus taking their investments outside their country of origin. Some countries are poor and don't have established factories and infrastructure, so all that they can offer is a cheap labor force.

Consequently, all labor intensive industries move to developing countries leaving people in developed countries without jobs. Theory says that new jobs will be opened in economy sectors where a developed country has a competitive advantage, but it didn't happen or it is happening too slow. Producers in developed countries get significantly cheaper products, but they are out of jobs. On the other hand, workers in developing countries are stuck with low salaries which are their only competitive advantage. If salaries get higher company moves to other low cost country. Because of very low saralies, they standard of living doesn't get improved, and as a final result their buying power remains slow.

Also, some of the developing countries claim that free trade is not fair. They can't compete on equal terms against already developed countries, thus giving space to economic exploitation.

Дата добавления: 2015-09-29