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Glossary Political Economy / Term

Free trade

A legal arrangement or national policy under which the exchange of goods and services across international borders is neither restricted nor subsidized by techniques of government intervention such as import tariffs, import quotas, export subsidies, discriminatory regulations disadvantaging foreign buyers or foreign sellers, trade embargoes, political manipulation of foreign currency exchange rates, and the like. From their first origins in the writings of Adam Smith up to the present, the classical and neoclassical schools of economic theory have emphasized the advantages of free trade policies and the disadvantages of protectionism for the improvement of popular living standards and the promotion of overall rates of economic growth.

Although the theoretical arguments can and do become extremely detailed and complex, the basic conclusion of classical and contemporary neoclassical economic theory is that the advantages of free international trade represent basically only a special case of the advantages of the free market system in general. Although moving toward free trade may represent very real financial losses for the small minority of companies with the political influence to get themselves protected from foreign competition, these losses are normally much more than counterbalanced by the gains to the great majority of the population. Free trade leaves the country's consumers free to seek out the best bargains they can find by not arbitrarily restricting their ability to choose foreign suppliers when they offer a better deal than their domestic competitors in terms of price and/or quality. This enhances competition and breaks down local monopolies. Free trade also enhances the profitability of many other local industries by enabling them to shop around for better deals in purchasing their supplies of raw materials and other capital goods and thus helping them to reduce their costs of production. In the most general terms, free trade makes possible a progressive extension of the area within which specialization and the division of labor takes place according to the principle of comparative advantage, producing gains from trade in overall productivity and economic efficiency that result in higher average living standards both at home and abroad.

Permanent link Free trade - Creation date 2020-06-14


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