Trading is the financial act of purchasing and selling products and services. It entails exchanging commodities for money or its equivalent. Free trade is the economic policy adopted by global markets in which imports and exports to other countries are neither restricted or discriminated against. Investors from other economies can trade freely without their governments imposing tariffs, quotas, or prohibitions on their goods and services, which could stymie the trading process. By lowering trade barriers, free trade allows goods and services from all over the world to compete with domestic products. This mode of trade has its implications both positive and negative this essay will explain some of the benefits of trade and why some governments may want to restrict free trade.
Trade can be classified into two main categories which include domestic and foreign or international trade. Domestic trade takes place within geographical boundaries of a country. Both the seller and buyer must belong to the same country. International trade refers to trade between two or more countries across the globe(Hammett 127). Domestic trade can further be classified into wholesale and retail trade where wholesale trade is the selling and buying goods in bulk. A wholesaler purchases goods directly from the producer and sells them to other distributors. Retail trade involves the sale of goods and services to end consumers by wholesalers or retailers. International trade can be broken down into import trade, export trade or entrepot trade. Import trade is the purchase of commodities from foreign countries while export trade refers to the sale of merchandises to a foreign country. Entrepot involves importing goods from country to export to a different country without any additional repackaging.(Floyd 47)
Trade is one of the key drivers of economic growth in many countries. States with strong domestic and international trade have the influence to control the global economy some of its benefits are: It encourages the development of an efficient and reliable source of goods to be exported. Trading also creates employment opportunities for the citizens of trading countries. Jobs are actualized when many foreign companies invest in an office, factory a distribution warehouse (Mankiw and Taylor 178). Trade expands business opportunities for domestic companies by opening up new markets, eradicating avoidable barriers for exportation. It also increases competition which helps lower global market prices., this benefits the customers by raising the purchasing power of their income. Trade also helps a country to obtain some of the goods which it cannot produce by importing at lower prices. Trading helps improve infrastructure as good means of transport and communication are an essential requirement for trade to take place. Trade also contributes to containing natural calamities such as drought and famine as such a nation can supply of goods can be met using imports from other countries(Irwin 105). Trade strengthens international ties between states that trade together where both countries mutually benefit. Trade also encourages the exchange of ideas and culture among various countries. Trade also brings about division of labor which is the breaking down of production into small manageable tasks to improve efficiency. Trade helps governments cut down its expenditures by expanding supply sources of goods which allow a competitive government procurement to take place(Irwin 75).
Free trade is quite advantageous as it enables countries to have access to what they are unable to produce. Despite the advantages of free trading many countries have enacted laws to limit imports (Floyd 47). These restrictions are implemented through tariffs, quotas, non-tariff barriers or an open prohibition. A tariff is a tax levied on imported goods. The impact of taxes is that it raises the selling price of imported goods. Tariffs give an advantage to domestic producers of the same products as they are then able to sell them at more affordable prices as compared to the imported commodities. Tariffs can also be imposed to protect the domestic market by making importation expensive. Quotas are trade restraints enacted by a government to limit the quantity or value of products that can be imported or exported at a given time. States can also apply embargos to stop exports or imports from a given country mostly for political reasons. Other forms of restrictions include subsidies and licenses. A subsidy is an amount of money granted by the government to help an industry keep prices of goods competitive and discourage importation. The government also uses licenses to restrict imports by limiting the number of licenses issued (Hammett 127).
Trade restrictions have both positive and negative impacts on a domestic economy as well as the international trade. The benefits include: governments impose restrictions to protect local jobs from cheap foreign labor. Free trade directly affects local producers when foreign suppliers lower their costs hence domestic jobs will be lost if locally produced goods cannot compete with cheaper imports. Restrictions are also applied to shield infant factories from competition for a while to allow them to become strong enough to compete with foreign markets (Marrison 14). Trade can lead to overspecialization this is a great risk to workers in case the global demand for a given product drops then the manufacturers will suffer a huge blow. Industries don’t get an opportunity to grow since they face stiff competition from more established global industries (George 80)
Trade barriers restrain free trade between nations these limits have negative impacts on domestic and international trade as well. Import tariffs increase the cost of goods globally which demotivates traders from importing which means that consumers can only use locally produced commodities this leads to reduced consumer satisfaction. Trade barriers also prompt diplomatic differences among countries. When countries trade connections fallout, it ruins essential relationships. For instance, when America put restrictions on Chinese tires, China struck back by putting barriers on American products (Bhagwati 32). Trade restrictions also result in reduced global economic growth. As states protect domestic companies, they reduce exporting opportunities to for developing countries hence industrialized nations remain wealthier while developing countries struggle economically. Barriers also increase local production cost when a government imposes tariffs on raw materials which have to be imported and manufacturers will be forced to pay more to get the inputs. These barriers may lead to more problem for the upcoming manufacturers like going out of business (Mankiw and Taylor 178).
As shown, there are benefits and drawbacks of applying trade restrictions, but it is very evident that the advantages of such policies far outweigh the disadvantages. Financial experts push more on the threats of trade barriers than the benefits and argue that it is not a solution in the long run. Governments might enforce trade barriers to protect domestic trade but only for a short term. Trade barriers raise the prices of both imports and domestic goods. These policies restrict customers’ options, and quality goes down to ease the competitive pressure.
Works cited
Bhagwati, Jagdish N. Protectionism. 1st ed. Cambridge, Mass. [u.a.]: MIT Press, 2000. Print.
Floyd, David. Business Studies. 1st ed. London: Letts, 2006. Print.
George, Henry. Protection Or Free Trade. 1st ed. Read Books Ltd., 2017. Print.
Hammett, Mike. Dictionary Of International Trade Finance. 1st ed. Canterbury: Financial World, 2001. Print.
Irwin, Douglas A. Free Trade Under Fire. 1st ed. Princeton, NJ: Princeton University Press, 2015. Print.
Mankiw, Nicholas Gregory, and Mark P Taylor. Microeconomics. 1st ed. London [u.a.]: Thomson, 2007. Print.
Marrison, Andrew. Free Trade And Its Reception 1815-1960. 1st ed. London: Routledge, 2003. Print.
