We explain what free trade is, what its advantages and disadvantages are and what a free trade zone is.
What is free trade?
When we talk about free trade, free market or commercial freedom, we refer to a business situation governed by the laws of supply and demand with the least possible intervention from the State.
It is an open commercial panorama, in which transactions are poorly controlled by taxes, restrictions and other obstacles through which the State seeks to regulate economic activity.
Free trade is defended by certain liberal economic positions according to which the only force that should govern economic exchange between individuals and companies is the so-called “invisible hand” of the market, that is, the balance between the supply of goods and services produced, and consumer demand.
Supply and demand would have to build a stable and self-regulated market free of situations that artificially favor one sector or the other (as happens when monopolies or oligopolies occur). This applies to both foreign trade (between countries) and internal trade (between economic actors in the same country.
Free trade emerged as an economic doctrine (known as “economic liberalism”) in the 18th century, driven by bourgeois revolutions that fought against the privileges of the aristocracy.
The implementation of free trade, however, continues to be the subject of controversy and debate. Some social sectors maintain that the greater the economic freedom, the greater the wealth produced; while others defend the need for an intervening State to avoid the concentration of wealth in a few hands and the construction of an unequal society.
See also: Foreign trade
Characteristics of free trade
In order to speak of free trade, the following characteristics must generally exist:
- Absence of import and export obstacles, such as tariffs, quotas, restrictions and prohibitions.
- Absence of subsidies and incentives from the State to protect or encourage certain economic sectors.
- Absence of price control policies, market share caps and penalization of competition.
- Absence of monopolies or oligopolies and other forms of market distortion by companies.
- More or less flexible conditions of employment hiring and dismissal.
- Absolute defense of private property.
Advantages and disadvantages of free trade
There is no universal criterion regarding the positive and negative consequences of free trade. There are many different positions regarding its appropriateness or the ways in which it can be applied in society. Its advantages and disadvantages are the subject of study and debate among specialists.
Advantages of free trade
Defenders of free trade point out the following virtues of this economic model:
- Generates codependency. It causes freely trading nations to depend on each other and strengthen commercial and diplomatic ties, which reduces conflicts or confrontations.
- Promotes comparative advantage. It encourages countries to focus their production on their best goods, to be able to import at a good price those that they are not capable of producing. This brings with it an improvement in the quality of life in the country.
- Does not distort trade. It allows the emergence of commercial dynamics free of mechanisms that distort their natural dynamics.
- Promotes economic growth. It enriches those who trade freely with each other, and allows them a reward for their work.
- Benefits society as a whole. It improves the quality of goods and services consumed by society, because it forces producers and merchants to compete with each other to capture consumption. In addition, it allows the diversification of the offer and, therefore, generates better forms of consumption.
- Avoid corruption and bureaucracy. By decreasing the presence of the State in economic affairs, the possibility of corruption and bureaucratism (that is, excessive intervention by the State) decreases.
Disadvantages of free trade
Those who oppose free trade point out the following problems:
- Favors the powerful. It benefits the strongest economic actors, who can apply unfair competitive practices, such as “dumping” and thus end up controlling the market.
- It hinders local markets. It eliminates the brakes on imports, which means that large global producers can flood local markets and threaten national production.
- Allows cartelization. It favors agreements between large competitors in a market niche, who can reach and impose prices that suit them.
- It harms workers. It promotes full freedom for companies, to the detriment of the rights of workers, who are forced to compete unfairly with cheaper labor.
- Concentrate wealth. It makes the rich get richer and the poor get poorer, thereby decreasing class mobility and increasing inequality.
What is a free trade agreement?
Free trade agreements (FTAs) are agreements to implement free trade between countries. Through these treaties, two or more countries decide to trade with each other in the most open way possible without tariffs, trade barriers or obstacles that limit the flow of goods and services between their territories. .
The first free trade agreement in history was signed in 1891 and was the treaty of Cobden-Chevalier between Great Britain and France. Many more have emerged since then, especially within the framework of the integration of countries whose regions historically tend toward mutual aid.
Some examples of FTAs are the Pacific Alliance, the defunct Free Trade Area for the Americas, the North American Free Trade Agreement and the Chile-United States Free Trade Agreement.
What is a free trade zone?
A free trade zone or free trade area is a region in which economic regulation standards are suspended or minimized and commercial that govern the rest of the territory. These are zones free of taxes, tariffs and restrictions, where goods flow freely.
Also known as free trade zones, these spaces can cover a city, a region of a country, or an area common to several nations, whose delimitations are established in a free trade agreement. In most cases they are located in developing countries and respond to the need to economically stimulate a certain region, attracting jobs and investments.
Free market and protectionism
The economic doctrine contrary to free trade in foreign trade issues is known as protectionism. The protectionist model proposes that The State plays an active role in regulating commercial exchange with the foreigner. The restriction of commercial freedoms generates a favorable scenario for local economic actors.
It is, therefore, an interventionist-type doctrine, in which the State intervenes as a regulatory entity of the economy.
For example, a protectionist policy may be to increase the price of a foreign merchandise, to stimulate the purchase of national merchandise and protect the local industry. These measures also bring profits to the State.
However, excessive interventionism can bring with it numerous risks, such as international economic isolation, the promotion of business dependence on the State and the low competitiveness of national products.
References
- Acosta, A. and Gudynas, E. (2004). Free trade: myths and realities: new challenges for the political economy of Latin American integration. Abya Yala Publishing House.
- Cambridge University Press & Assessment. (2024). “Free Market”. Cambridge Dictionary. https://dictionary.cambridge.org/
- Ministry of Economy of Argentina. (sf). “Preferential and free trade agreements.” https://www.argentina.gob.ar/
- Orlitzky, M. (2024). “Free market (economics)”. The Encyclopaedia Britannica. https://www.britannica.com/
