Free Trade

Introduction

Free Trade: An economic policy that allows the exchange of goods and services across global borders with minimal restrictions. This concept fosters international collaboration and economic growth by eliminating obstacles.

• Unregulated Exchanges:
  • Absence of tariffs, quotas, or subsidies, which supports an unhindered flow of goods and services.

Impact of Free Trade

Specialisation and Comparative Advantage

• Theory Explanation: Ricardo's comparative advantage theory is essential for grasping the principles of free trade.
• Example:
  • Country A excels in wine; Country B excels in cloth.
  • Each reduces its opportunity costs by focusing on their strengths.
  • Benefits:
    • Country A obtains cloth at a lower cost.

- **Country B** enjoys reduced wine expenses.

Economies of Scale

• Definition: Economies of Scale arise when production costs decrease as the scale of production rises.
• Benefits arising from free trade include lower prices for consumers and increased profitability for producers.

Consumer Choice and Innovation

• Increased Diversity: Free trade expands the range of products available, offering consumers more options.
• Catalyst for Innovation: Global competition drives innovation and optimal resource utilisation.

Lower Prices

• Impact of Tariff Removal: Eliminating tariffs reduces business costs, resulting in significant price decreases for consumers.

• Example: Following the EU-Japan trade agreement, there were notable reductions in the prices of consumer electronics, including televisions.

Product	Pre-trade Price (£)	Post-trade Price (£)
TV	600	420

Economic Growth

• GDP: Gross Domestic Product serves as an indicator of economic performance and growth.
• Example: The European Union experienced a boost in GDP following free trade agreements.

Region	Pre-Free Trade GDP Growth Rate (%)	Post-Free Trade GDP Growth Rate (%)
European Union	1.2	2.4

Criticisms of Free Trade

Main Criticisms

• Job Losses: Industries relocating can lead to potential unemployment.
• Environmental Concerns: Lack of regulations may increase pollution.
• Vulnerable Infant Industries: New industries might struggle to compete.

• Dumping Practices: Foreign goods sold below cost can harm local markets.

Job Losses

• Impact: Particularly affects manufacturing jobs due to skills mismatch.
• Example: Job losses in the US rust belt owing to factory closures.

Environmental Concerns

• Issues: Industries may exploit regions with weaker standards, negatively impacting biodiversity.
• Real-world Example: Increased industrial activity has led to deforestation in Indonesia.

Dumping

Dumping: The practice of selling goods below production cost to dominate markets and undermine local industries.

• Consequences: This can weaken domestic businesses and lead to job losses.