Free trade is the policy of economics in which countries’ governments do not restrict imports or exports to other countries. These restrictions can include: tariffs, import quotas, and export restraints. Free trade is part of trade agreements that can be made by countries. The goals of these agreements are to expand markets and stimulate economic growth.There are many different types of trade agreements. Of those many, there are multilateral and bilateral trade agreements (Amadeo, “What Are…”). Multilateral are between different nations at one time and bilateral are between two. The United States has bilateral agreements currently with twelve countries, dating back to 1985. The benefit of bilateral over multilateral is that they are much easier to negotiate. All global trade agreements are multilateral. The largest multilateral trade agreement is the North American Free Trade Agreement, which was enacted in 1994. This free trade agreement is between the United States, Canada, and Mexico. Kimberly Amadeo states: “…it increased trade 300% to $1.6 trillion”. Another multilateral agreement is CAFTA, or Central American-Dominican Republic Free Trade Agreement. It is a fairly new agreement, having been signed in 2004. For six countries that the United States exports to, it eliminated over 80% of the tariffs. The WTO, or World Trade Organization, is the global promoter of free trade. Amadeo states: “First, it administers existing multilateral trade agreements. Every member receives Most Favored Nation Trading Status. That means they automatically receive lowered tariffs for their exports”. The World Trade Organization can also settle trade disputes and manage ongoing negotiations for trade agreements (Amadeo, “Multilateral Trade…”).
Free trade comes with benefits. Denise H. Froning states: “The economy responded well to the expansion of trade that occurred after the signing of the North American Free Trade Agreement in 1933 and the establishment of the World Trade Organization in 1995..”. One of the primary groups that are affected by free trade are the consumers. Free trade allows consumers to buy quality goods at a lower cost. This is because there are no further taxes imposed during the trade, so this leads to the end cost at the consumer level to be lower (Froning). Froning states: “Few people in America today sew all their own clothes, grow all their own food, build their own houses, or buy only products made in their own states. It would cost too much…”. For example, Chinese goods are able to come to the United States at an extremely low cost, even though they have a relatively low-income. If another country can make a product faster and cheaper, than they should be the producer (Froning). Donald J. Boudreaux states: “Cheaper imports, particularly from countries such as China and Mexico, have eased inflationary pressure in the United States”. Having free trade also has benefits at not just the consumer level, but at the producer level as well. When goods are imported at a lower cost, it can reduce the business’s production costs. This leads to more economic growth (Boudreaux). Boudreaux says, “Free trade means more growth. At least half of US imports are not consumer goods; they are inputs for US-based producers, according to economists from the Bureau of Economic Analysis”. Competitiveness is also a direct result of free trade. As Boudreaux says, “Free trade does not require American businesses and workers to adapt to the shifting demands of the worldwide marketplace…”. But, he later goes on to add that it is “critical” to engage in this competitiveness in order to thrive, stay successful, and ultimately have long-term growth. As is the case with multilateral and bilateral, free trade has each country involved under the same guidelines. These guidelines promote equality between all parties and promote fairness. This does not allow unfair advantage or the finding of loopholes (Boudreaux). Denise H. Froning describes the benefits of free trade by saying, “Free trade helps to spread the value of freedom, reinforce the rule of law, and foster economic development in poor countries”.
Free trade also comes with debated disadvantages. Dave Johnson argues that, “It [free trade] enabled goods from low-wage countries into the U.S. with no protective tariffs”. It can be argued that countries sometimes use cheap foreign labor with hardly any regulations. Johnson states: “…to drive down those costs here as well, and ultimately weakening democracy itself”. To protect trade, one way being imposing tariffs, is called trade protectionism. These tariffs raise the price of the imported goods and make them similar in price to the local market. After World War I, a tariff was imposed to protect local farmers from imports. Unfortunately, the bill had tariffed many more imports and other countries were not happy. This led to a tariff war. It was called the Smoot-Hawley Tariff of 1930 and was one of the reasons the Great Depression was extended. A country can also protect trade by subsidizing local industries with tax credits, which free trade agreements can do as well, or imposing quotas on imports (Amadeo, “Why Protectionism”…). Amadeo states: “In the long term, trade protectionism weakens the industry. Without competition, companies within the industry won’t innovate and improve their products or services”. If the United States were to increase protectionism, it would slow economic growth. Many United States workers rely on exports for their job. Increasing protectionism could potentially lead to more layoffs (Amadeo, “Why Protectionism”…). Amadeo goes further to say, “The Peterson Institute for International Economics estimates that ending all trade barriers would increase U.S. income by $500 billion”.
Having free trade can lead to increased economic growth, promotes equality, reduces production costs, and provides a quality product at a lower cost for the consumer. If free trade were imposed in every country, it would have the potential to stimulate their economy even if they were of a poorer income. Trade should be free for these reasons. Leaning towards trade protectionism can damage an economy and weaken their market.
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