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A. Advantages of free trade
Free trade occurs when there are no artificial barriers put in place by governments to
restrict the flow of goods and services between trading nations.
When trade barriers, such as tariffs and subsidies are put in place, they protect domestic
producers from international competition and redirect, rather than create trade flows.
i. Increased production
Free trade enables the countries to specialise in the production of those
commodities in which it had a comparative advantage.
With specialisation countries are able to take advantage of efficiencies generated
from economies of scale and increase output.
International trade increases the size of a firm’s market, resulting in lower average
costs and increased productivity.
ii. Production efficiencies
Free trade improves the efficiency of resource allocation. The more efficient use
of resources leads to higher productivity and increasing total domestic output of
goods and services.
Increased competition promotes innovative production methods, the use of new
technology, marketing and distribution methods.
iii. Benefits to consumers
Consumers benefit in the domestic economy as they can now obtain a greater
variety of goods and services.
The increased competition ensures goods and services, as well as inputs, are
supplied at the lowest prices. For example in Australia imported motor vehicles
would cost 35% more if the 1998 tariff levels still applied. Clothing and footwear
would also cost around 24% more.
iv. Foreign exchange gains
When Australia sells exports overseas it receives hard currency from the countries
that buy the goods. This money is then used to pay for imports such as electrical
equipment and cars that are produced more cheaply overseas.
v. Employment
Trade liberalisation creates losers and winners as resources move to more
productive areas of the economy. Employment will increase in exporting
industries and workers will be displaced as import competing industries fold in the
competitive environment. With free trade many jobs have been created in
Australia, especially in manufacturing and service industries.
vi. Economic growth
The countries involved in free trade experience rising living standards, increased
real incomes and higher rates of economic growth.
B. Disadvantages of free trade
Although free trade has benefits, there are a number of arguments put forward by lobby
groups and protestors who oppose free trade and trade liberalisation. These include:
i. With the removal of trade barriers structural unemployment may occur in the
short term (it is interesting to note however that when tariffs increased greatly in
the period 1974–1984 for textiles and footwear - employment in the sector fell by
50 000 for the same period).
ii. Increased domestic economic instability from international trade cycles, as
economies became dependent on global markets. In the global financial crisis and
recession of 2008-2009 the impact of falling employment meant that protection
pressures started to rise in many countries. In New South Wales for example the
Government was urged to buy Australian goods to save jobs in New South Wales
and Australia. The government of NSW was criticised for purchasing uniforms
for police and firefighters at cheaper prices overseas rather then purchasing
Australian made uniforms from Australian companies. Similar pressures occured
in the United States, Britain and other European countries.
iii. In the same way many international banks were only saved by Government
investment in them and Government provision of capital and loans. These banks
were often pressured in return to lend domestically rather than lend to
international businesses and investors.
iv. International markets are not a level playing field as countries with surplus
products may dump them on the world markets below cost. Some efficient
industries may find it difficult to compete for long periods under such conditions.
v. Developing or new industries may find it difficult to become established in a
competitive environment with no short-term protection polices by governments.
vi. Free trade can lead to pollution and environmental problems as companies fail to
include these costs in the price of goods.