You will often hear politicians and economists talking about the virtues of free trade. While it’s a term that’s used often, explanations as to what it is and the benefits it can deliver are harder to find.
At SSO International Forwarding, free trade underpins everything we do.
Our involvement with the new Liverpool City Region Freeport takes this commitment further, creating opportunities for businesses to take advantage of favourable import and export regulations.
In this guide, we explore what free trade is in detail, how it works, its advantages and disadvantages and who it benefits.
What does free trade mean?
Free trade refers to a system of trade and exchange of goods and services usually between different countries.
It is argued that when governments remove tariffs, quotas or other restrictions, the competition that follows will lead to greater efficiency and innovation.
As a result, companies must improve their products and reduce their operating costs to remain competitive in the global marketplace.
Free trade can also refer to the break-up of state monopolies or other highly regulated industries within a country to encourage greater competition.
The basic principle of global free trade is that different countries will specialise in developing goods and services in which it has a comparative advantage.
They may be able to produce goods more efficiently than others due to having access to natural resources, or because of lower labour and property costs. For example, one country may possess the advanced skills and knowledge required to manufacture high-tech products at a lower cost than a competitor that has a smaller pool of skilled workers, or a lack of infrastructure.
By allowing different countries to specialise and then trade with other countries to secure access to all of the goods and services that they need, the free trade principle should lead to all countries benefiting because costs are reduced.
Countries will have greater choice and will pay less for goods and services, ultimately raising the living standards of consumers.
The UK is linked to a system of global trade, with goods and services from across the world available to UK consumers. The UK also exports high-quality goods and services across the globe.
Shipping physical goods to other parts of the globe requires infrastructure and a range of ancillary services.
SSO International Forwarding provides a range of these to ensure companies are able to trade freely with customers located anywhere.
What are examples of free trade?
Free trade is widespread across the world and is generally seen as an engine of economic growth.
Countries are able to enter into free trade agreements that remove tariffs, quotas, and other barriers, giving companies access to each other’s markets.
Three examples of large-scale free trade agreements are:
- The European Union (EU)
The EU is a regional economic and political union that has a customs union and a single market. In practice, this means that goods and services originating from any member country can be bought and sold freely across the union. The EU has also entered into free trade agreements with other countries to facilitate access to EU markets. However, detractors argue that the EU limits free trade outside of the union. When the UK left the EU, those in favour of the decision argued the country would be better placed to enter into free trade agreements with governments in other parts of the world whose economies were enjoying faster economic growth.
- Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
The UK recently became the 12th country to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This is a free trade agreement made up of countries around the Pacific and beyond, including Canada, Australia, Japan, Mexico, and New Zealand. It aims to remove red tape and tariffs, facilitating easier trade between the constituent countries. Members of the agreement are home to around 500 million people and generate more than 13 per cent of the world’s income.
- Association of Southeast Asian Nations (ASEAN)
ASEAN is a regional intergovernmental organisation consisting of 10 member states in Southeast Asia. The ASEAN Free Trade Area (AFTA) was established in 1992, and aims to reduce tariffs and other trade barriers between member states.
What are the advantages and disadvantages of free trade?
Proponents of free trade point to a range of advantages it has over other economic models. They argue that it has a unique ability to deliver real benefits for economies and societies.
First, it increases competition both among firms and between countries.
This can lead to lower prices for consumers, increased innovation, and a more efficient allocation of resources. It can force uncompetitive or non-viable companies to change or go out of business, allowing better-run rivals to prosper.
This competition also encourages firms to specialise in areas where they have a comparative advantage, further increasing productivity and output.
Innovation and improved productivity, alongside access to international markets, allows consumers to choose from a wider range of goods and services at lower prices. When countries are able to trade between themselves, consumers can then buy products or services from around the world, including some unavailable in the domestic market.
When countries specialise in producing goods and services in which they have a competitive advantage, it can stimulate economic growth.
Specialisation leads to greater efficiency, which boosts output and overall economic growth. Trade and consumer activity help to create a flourishing economy, generating revenue for companies and governments. Economic growth means more money in government coffers to spend on public services and vital infrastructure.
Free trade encourages foreign investment into a country because investors seek to take advantage of lower costs and higher returns. This increased foreign investment can lead to higher employment and more money circulating in the local economy, stimulating economic activity.
By opening up global markets, companies are able to access new areas. It also increases their pool of potential customers and revenue. This can be particularly beneficial for small and medium-sized enterprises, giving them the potential to grow and develop.
Finally, free trade promotes international cooperation, creating links and greater interdependencies between countries. This promotes stronger connections and better understanding, reducing the risk of conflict.
However, a number of criticisms of free trade are often made.
One of the main concerns is the impact it can have on employment in industries that become less competitive in the global marketplace. Competitor countries may be able to produce goods more cheaply, making it difficult for domestic industries to compete. As a result, they may be forced to lay off workers or shut down altogether.
It’s also argued that free trade may lead to reduced environmental and labour standards as companies engage in a “race to the bottom” to compete. Free trade creates a dynamic where national governments face pressure to remove safeguards and standards to enable countries to compete more effectively.
Free trade can also lead to greater dependence on foreign suppliers, as national industries cannot compete with cheaper foreign industries.
In some cases, a country could find its manufacturing base reduced making it reliant on goods produced overseas.
When free trade is working well, this need not be a problem but if there are global shocks, trade disputes or supply chain disruptions, difficulties can occur. At times of rising tension, reliance on overseas trade and supplies can be used as a diplomatic tool against you, limiting your scope for manoeuvre and national resilience.
One argument against global free trade is that it can result in a loss of sovereignty.
It’s argued that free trade can undermine national sovereignty by giving foreign investors and multinational corporations too much power to challenge domestic laws and regulations. In some free trade models, corporate interests are able to bypass local laws and regulations for their own gain.
It’s important to remember that economists differ in their understanding of free trade, its benefits, and potential disadvantages.
In reality, most countries operate a mixed approach to free trade, opening up their markets to some countries and in certain sectors, while retaining tariffs and quotas in others.
Who benefits from free trade?
Free trade has the potential to benefit a range of individuals, businesses, and institutions.
Consumers are often the first to benefit from free trade. As countries open up their markets to international competition, consumers have access to a wider range of goods and services at lower prices.
This can lead to significant cost savings for households and help to boost their buying power.
The competition provided by free trade also often facilitates innovation and new products produced at lower prices, further benefiting consumers and broadening choice.
Industries that rely heavily on exports and access to overseas markets benefit when barriers to trade are lowered.
They are able to gain access to new markets to increase their potential customer base, increase their sales, and grow their business. For example, if a country manufactures cars, then car companies benefit if trade barriers are removed. The automobile industry is often at the forefront of debates about free trade, with arguments between free trade and protectionism often impacting government policy in what’s often seen as a key sector.
While it’s often argued employees suffer as a result of free trade, the economic activity that it generates can kickstart emerging industries and create new jobs. Greater demand for skills and experience can give workers more choices and bargaining power. Economic growth from more exports can ultimately lead to higher wages and better working conditions.
One of the key arguments for free trade is the impact it can have on small and medium-sized enterprises. These are the kind of businesses that have significant growth potential but lack the resources to navigate a complex system of tariffs and trade regulations. By reducing barriers, smaller businesses are able to move into new markets and grow their customer base.
This generates economic activity, new jobs, and more vibrant economies. Companies like SSO International Forwarding help to facilitate SME growth by providing vital services to simplify the import and export process.
Governments also benefit from free trade by encouraging economic growth, attracting foreign investment, and building stable strategic ties.
By reducing trade barriers and promoting competition, governments hope to foster a more efficient and dynamic economy. A more vigorous economy with higher growth generates more tax revenue which can then be spent on public services and infrastructure.
At SSO International Forwarding, we provide a range of services to help businesses take advantage of the benefits of free trade. We assist them to negotiate the import and export process, opening up new markets and growing their business.
Our role at Liverpool City Region Freeport, as its first customs site operator, takes this further.
It’s predicted that the new facility will add £850m to the local economy and contribute towards plans to boost research and development, and green technologies.
Contact us to find out more about Liverpool City Region Freeport and our role at the site.