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Free Trade: Definition & Facts - The Main in Brief

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As decisions are made – either individually or as a society – we constantly make trade-offs in order to get more of one thing by giving up another. A trade-off is when we choose one option in favor of another and the opportunity cost is what is sacrificed in order to get something. Also important in modern society is the trade-off between a clean environment and a high level of income.Therefore, the government is crucial to improving market outcomes. Free trade, also known as laissez-faire, is a policy that the government does not discriminate against imports or interfere with exports by applying tariffs (for imports) or subsidies. However, free trade policies do not necessarily mean that a country has abandoned all controls and taxes on imports and exports.

Though many people remain skeptical of free trade, it has several clear benefits for the nations who take advantage of it. Higher trade volumes, greater comparative advantage opportunities, more efficient use of raw materials, stronger economic growth, and increased cooperation amongst nations are all positive results created by more free trade. Besides, countries benefit from trade and specialization as get a better price abroad for goods they produce and buy other goods more cheaply from abroad than could be produced at home. For example, goods imported from low-income countries like China, the market price will drop by more than 2% for every 1% reduction in prices, which will give Americans more income to buy other products.

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The theoretical case for free trade is based on Adam Smith’s argument in The Wealth of Nations, the Invisible Hand. He was describing his observance that wealth does not live in a vacuum and that people acting in their own self interest will eventually act in the best interests of the greater public good. This concept aligns with laissez-faire economics because humans are relatively predictable in their behavior. For example, you predict that stationery and books will be sold when you go to the bookstore. The bookstore in turn predicts that wholesalers will regularly ship stationery and books to their warehouses, and finally wholesalers predict that publishers and distributors will. All of this must be done on a regular basis – in fact every day – to ensure that there are enough stationery and books available to students across the country.

Smith’s insights advocate minimizing government intervention and taxing free markets. He pointed out that government restrictions on trade (such as quotas, tariffs and taxes) would interfere with supply and demand and prevent both parties from pursuing natural trade. If it does not limit the freedom of individuals to engage in their own business and industrial affairs, they should allow enterprises to produce what they want without limit and earn as much money as possible. It is competition and supply and demand that controls, propels and regulates markets.

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