What is Free Trade?
Free trade is a system of trade policy that allows traders to trade across national boundaries without interference from the respective governments.
Reasons for Free Trade
Domestic Non-availability: A nation trades because it lacks the raw materials, climate, specialist labour, capital or technology needed to manufacture a particular good. Trade allows a greater variety of goods and services.
Cost effectiveness: It is cheaper to buy from other countries rather than producing themselves.
Benefits of Trade
Lower prices for consumers: When there is free trade, consumers can free to buy goods from the producer who is willing to sell at the lowest prices. Hence consumers gain from lower prices.
Greater choice for consumers: With free trade, consumers have access to variety of goods and services from different producers across the globe. This means more choice.
Ability of producers to benefit from economies of scale: Producers have access to a larger market thus they can produce more at lower cost and benefit from economies of scale.
Ability to acquire needed resources: Through free trade producers can not only sell in a large market but also gain from purchasing from suppliers across the world.
More efficient allocation of resources: When there is free trade, the most efficient producers get the opportunity to produce due to their cost efficiency. This leads to productive efficiency.
Increased competition: In free trade producers from different regions can compete with each other in terms of price, quality and variety. Increased competition leads to efficient allocation of resources.
Source of foreign exchange: Free trade involves the transaction of goods and services between nations. In order to purchase goods from abroad (imports), we need foreign currency. This is possible through exporting of goods to other countries.
Free Trade diagrams
