Free trade means trade between countries without barriers such as tariffs and quotas.
Free trade is international trade without government restrictions, such as tariffs or quotas. International trade is the exchange of goods and services between countries.
Advantages: consumers get lower prices and more choice. Firms can sell to larger markets, gaining economies of scale. Competition from abroad pushes domestic firms to become more efficient. Firms can buy cheaper raw materials and parts.
Disadvantages: domestic firms may be unable to compete with cheaper imports, so they close and workers lose jobs. Countries may become dependent on others for important goods. Free trade may allow the import of harmful goods, or goods made under poor working or environmental standards.
Free trade agreements reduce barriers between member countries. Singapore has many such agreements, which suits a small economy that depends on exports.
- Free trade
- Trade between countries without restrictions.
- International trade
- Exchange of goods and services between countries.
- Gainers
- Consumers, exporters, efficient firms.
- Losers
- Uncompetitive domestic industries and their workers.
Worked example: Free trade for a small, open economy
Singapore's total trade is worth more than three times its GDP.
- Exports: firms sell to markets far larger than Singapore's own.
- Imports: consumers and firms buy food, energy and parts it cannot produce.
- Free trade agreements keep the tariffs on its exports low.
- Risk: a global downturn quickly reduces orders for its exports.
Watch out for this
Free trade always benefits every group in a country.
Consumers and exporters usually gain, but workers and firms in industries that cannot compete with imports can lose.
Check your understanding
Which group is most likely to lose from free trade?
- Workers in a domestic industry that cannot compete with cheaper imports
- Consumers who buy imported goods
- Exporters selling to foreign markets