A free trade agreement (FTA) is an agreement between two or more countries to eliminate or reduce tariffs and other trade restrictions. When governments do not intervene with tariffs, subsidies, quotas, or restrictions, free trade allows the unrestricted sale and purchase of products and services across national borders. Let us discuss free trade agreements and their role in economic liberalization.

Learn How Free Trade Agreements Work

A formal and consensual agreement between the relevant governments implements free trade policies in today’s world. However, the absence of trade barriers may constitute a free-trade policy. The adoption of free agreements does not imply the complete elimination of protectionist measures by governments. Few FTAs in today’s international trade result in totally free trade.

“On the Principles of Political Economy and Taxation,” released by economist David Ricardo in the year 1817, explained the benefits of free trade. It stated that to shield domestic producers from international competition; it may establish tariff regulations that exclude some products from duty-free entry. An exception to free commerce could include the prohibition of certain pharmaceuticals not permitted by its regulators, unvaccinated animals, or food that has been processed that does not satisfy its requirements.

FTA in practice

Free trade has reached a high point in the European Union. The introduction of the currency euro by a majority of the member nations has facilitated trade between them because it creates a unified economic entity with virtually no borders. Notably, a Brussels-based bureaucracy is responsible for regulating this system and resolving the numerous trade-related concerns that arise between the delegates of member nations.

The United States, Canada, and Mexico are all signatories to the North American Free Trade Agreement (NAFTA), whereas the majority of Central American countries are members of the Central American Free Trade Agreement (CAFTA). Separate trade pacts have been signed with countries between Australia and Peru.

According to official statistics, over half of all imports into the United States are duty-free due to these accords. Tariffs on industrial imports hover around 2%. Even with all these deals, we still don’t have free trade. Steel, sugar, autos, milk, tuna, cattle, and denim are just a few of the hundreds of imports that special groups in America have succeeded in convincing to have their trade restricted.

All You Need to Know About the Role of Free Trade in Economy Liberalization

Theoretically, free trade between countries is the same as trade between individuals, communities, or states. It lets companies in each country focus on making and selling the products that make the most efficient use of their resources. It will also permit nations to import products in short supply or unavailable in their own country, leading to an upgraded trade industry 4.0. By balancing domestic production with imports and exports, economies can grow more quickly while satisfying shoppers’ demands.

According to economist David Ricardo’s book, this concept was first widely disseminated in 1817. He maintained that a country’s resources, expertise, and specialized skills would be better exploited through free trade, which would increase the variety of commodities offered at reduced prices. A few of the popular free trade schemes are:

Mercantilism

Mercantilism was the dominant economic philosophy in international trade before the 18th century. According to this hypothesis, a country’s wealth might be increased by maintaining a trade surplus and stockpiling precious metals. Countries often enacted trade barriers, such as taxes and tariffs, to prevent their citizens from buying foreign goods in order to improve their trade liberalization. As a result, shoppers were encouraged to buy goods produced here at home.

Comparative advantage

According to Ricardo’s law of comparative advantage, free trade is the best way for countries to maximize their prosperity. Ricardo showed that countries might increase their output more than they could if they restricted trade by focusing on manufacturing goods with a comparative advantage.

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An Overview of the Pros & Cons of Free Trade

Pros

Heeding Ricardo’s thesis, countries may manufacture more things together by trading on their different advantages. Free trade allows buyers to reach out for inexpensive items on the world’s open markets. It might benefit countries with cost-effective labour or resources. The other notable advantages are:

Lightning-fast growth

Many nations have experienced spectacular economic growth thanks to free trade. It has led to luring international investment and creating well-paying jobs for people by concentrating on exports in which they have a competitive advantage.

Reduced costs worldwide

Consumers benefit from free trade because it fosters a competitive market where countries offer their goods and services at the lowest possible rates. As a result, producers can offer finished goods at lower costs, boosting customer purchasing power.

Cons

Economies may become strategically vulnerable during a crisis if they come to rely on the international marketplace for essential goods. Local job losses and failures due to import competition are possible outcomes. Companies may move their operations to countries with fewer restrictions, which could lead to increased pollution or unsafe working conditions. The other disadvantages are:

Job losses & economic stagnation

Not everyone benefits economically when trade barriers are lowered. Domestic industries won’t be able to keep up with their overseas counterparts, leading to a rise in unemployment. There is a risk that major firms would relocate to nations with less stringent regulations on child labour and pollution.

Increased reliance on the international economy

There is a risk that free trade will increase national dependence on foreign markets. For instance, a country may get strategic gains by producing items domestically, even if their costs are lower on the international market. In the case of a major conflict or national emergency, the country may need to start over in specific sectors.

Final words
A free trade policy allows for low-cost imports and exports without the imposition of tariffs or any trade restrictions. As a result, economies worldwide can share resources at reduced costs.