In: Economics
What are the benefits of free of trade? Explain
Free trade means that countries can import and export goods without any tariff barriers or other non-tariff barriers to trade.
Essentially, free trade enables lower prices for consumers, increased exports, benefits from economies of scale and a greater choice of goods.
In more detail, the benefits of free trade include:
1. The theory of comparative advantage
This explains that by specialising in goods where countries have a lower opportunity cost, there can be an increase in economic welfare for all countries. Free trade enables countries to specialise in those goods where they have a comparative advantage.
2. Reducing tariff barriers leads to trade creation
Trade creation occurs when consumption switches from high-cost producers to low-cost producers.
3. Increased exports
As well as benefits for consumers importing goods, firms exporting goods where the UK has a comparative advantage will also see a significant improvement in economic welfare. Lower tariffs on UK exports will enable a higher quantity of exports boosting UK jobs and economic growth.
4. Economies of scale
If countries can specialise in certain goods they can benefit from economies of scale and lower average costs; this is especially true in industries with high fixed costs or that require high levels of investment. The benefits of economies of scale will ultimately lead to lower prices for consumers and greater efficiency for exporting firms.
5. Increased competition
With more trade, domestic firms will face more competition from abroad. Therefore, there will be more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from charging too high prices.
6. Trade is an engine of growth.
World trade has increased by an average of 7% since 1945, causing this to be one of the significant contributors to economic growth.
World exports of goods and services has increased to $2.2 trillion (2016)
7. Make use of surplus raw materials
Middle Eastern countries such as Qatar are very rich in reserves
of oil, but without trade, there would be not much benefit in
having so much oil.
Japan, on the other hand, has very few raw materials; without
trade, it would have low GDP.
8. Tariffs may encourage inefficiency
If an economy protects its domestic industry by increasing tariffs industries may not have any incentives to cut costs.