Economics

What Is Free Trade?

Free trade is a theoretical policy in which governments impose no taxes, tariffs, duties, or quarters on imports and exports.

Free trade is a theoretical policy in which governments impose no taxes, tariffs, duties, or quarters on imports and exports. It is theoretical since all governments practice protectionism to eliminate foreign competition and protect local industries. Industrialized countries negotiate free-trade agreements (FTAs) with other countries to have special trade considerations. Though FTAs do not guarantee unrestricted trade, they lower tariffs, taxes, and duties. An example is the North American Free Trade Agreement (NAFTA) between Mexico, Canada, and the United States. The concept of free trade does not revolve around imports and exports alone; it is a tinderbox of human rights concerns, environmental standards, global economic growth, job creation on the international stage, and local job losses. 

World Trade Organization

The World Trade Organization is at the center of global free trade. It provides a forum for countries to negotiate and deliberate trade agreements. Its primary objective is to liberalize trade by countering high tariffs and protectionism. The organization also settles trade disputes by interpreting trade contracts and agreements. Most governments participate in FTAs and are members of the WTO but continue to impose restrictions. In 1963, the United States automotive industry was nearing collapse due to competition from foreign industries prompting President Lyndon Johnson to impose a 25% tariff on imported vans, cars, and light trucks. 

"Freer" Trade

Agreements negotiated through the World Trade Organization is not free trade but "freer" trade since it achieves reduction rather than elimination of restrictions. The WTO advocates for a global trade system that does not discriminate partners but treats all countries equally. However, disputes arise when exporting countries subsidize their industries to promote dumping of cheap products to importing countries at the peril of local industries. The WTO allows import restrictions in such situations, but states have used this as an excuse to impose stringent quotas. 

Protectionism

When an exporting country subsidizes her industries unfairly, then the importing country has the right to protect the local market from being flooded by cheaper goods that hurt the local industries. Most countries place quotas or impose high taxes on such products, but in extreme cases, governments subsidize local productions to compete with foreign products.  

A Global Trade Race

 Free international trade is not always fair for industries in developing countries. It opens up the local market for foreign goods, making them vulnerable to the financial muscles of multinational corporations. Some organizations take advantage of cheap labor costs to produce export goods in developing countries but often subject employees to poor pay and harsh working conditions. As the world economy continues to grow, the global trade imbalance keeps growing, and states impose steeper barriers. 

About the Author

  • Victor Kiprop
  • Writer

Victor Kiprop is a writer from Kenya. When he's not writing he spends time watching soccer and documentaries, visiting friends, or working in the farm. 

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