Free Trade and Trade Agreements
Free trade is an idea of a free market where a country eliminates trade restrictions on imports and exports. It is characterized by free movement of labour, free entry to markets and access to market information and conduction of trade without taxes (Bustos, 2011). Usually, trade agreements are established between two or more nations. The agreement determines the regulation and tariffs that should be imposed on imports or exports. Trade agreements are related to several pros and cons. Removal of tariffs lowers import prices and also contributes to numerous consumer benefits. Nevertheless, domestic industries may suffer from the entry of new competitors. Free trade may force domestic businesses to close and as a result, contributing to unemployment. The trade usually forces trade-offs among companies and customers. On the other hand, domestic firms benefit from the existence of new markets for their products.
The World Trade Organization and Government Role
The World Trade Organization is the body that aids in global trade agreements negotiations. The body reinforces agreements on tariffs and trade between nations and resolves complains among them (Bustos, 2011). The government also plays a significant role in imposing protection policies to support domestic trade and industries. A government can restrict free trade through import quotas, non-tariff barriers, and taxes.
Benefits of Free Trade
Free trade creates good relations among nations. It opens up economies that allow the circulation of goods and services that aid in competition. Free trade eliminates artificial prices and false demand since it offers a true picture of the actual economy. Member countries achieve mutual gains from the trade since each nation can specialize in production and, in turn, gain a comparative advantage. The gains achieved by member countries include reduced costs for consumers, a variety of choices of products, available markets for domestic industries, heightened competition, and economies of scales.
Bustos, P. (2011). ‘Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms’, American Economic Review, 101 (1): 304–40