What Is Free Trade?

Free trade, in its purest form, is a trade policy that allows participating countries to trade with one another without their governments imposing any tariffs on imports, or providing any subsidies on exports. Essentially, the governments in a free trade agreement (FTA) agree not to subsidize their own industries that import or export goods or services to give them an edge over the other nations involved, while also agreeing not to put restrictions on the businesses from the other nations.

Benefits of Free Trade

There are several benefits of free trade agreements. FTAs make it easier for investors to invest across borders. They also cut costs for companies that import or export within the countries in the agreement. Free trade agreements can also be used to help protect copyrights, trademarks, patents and other intellectual property rights of individuals and business entities in the countries involved. The U.S. government has also used FTAs in an attempt to promote the rule of law in developing member nations. The hope is that the developing nation will be willing to comply with international standards because it doesn't want to lose an FTA.

Another potential advantage to free trade agreements is that the easy access to foreign goods and services gives consumers more options. In some cases, this allows consumers to get a higher quality product or service. It might also allow them to purchase the same goods at a lower price, either by buying a less expensive foreign version of the product or because domestic manufacturers lower their prices to remain competitive.

Drawbacks of Free Trade

While free trade has its advantages, there are also disadvantages. Some argue that free trade agreements inherently favor stronger, more prosperous nations and cause harm to developing nations. For example, critics suggest that fledgling businesses in developing countries find it hard to compete with established corporations that produce similar products in more economically secure nations. Others contend that FTAs harm domestic industry and workers because businesses choose to outsource production to countries where labor and other costs are much cheaper, which takes away domestic jobs and economic development. Still others suggest that FTAs lead to a greater disparity in wealth in all nations involved, basically allowing the rich to get richer while causing the poor to get poorer and reducing opportunities for smaller business entities.

Examples of Free Trade Agreements

Examples of free trade agreements include:

  • NAFTA. The North American Free Trade Agreement is an FTA between the United States, Mexico and Canada.
  • EU. All European Union member states are expected to enter into FTAs with all other member states. The EU also negotiates FTAs between the EU and non-member nations.
  • ASEAN. The Association of South Eastern Asian Nations is an FTA formed in 1967 between Thailand, Singapore, the Philippines, Indonesia and Malaysia. Brunei, Laos, Burma, Vietnam and Cambodia have since joined ASEAN.
  • Mercosur. Mercosur is a South American FTA. Uruguay, Paraguay, Argentina and Brazil founded Mercosur in 1991. Mercosur includes several "associate nations" that are not full members, but who can join FTAs with member nations.

The World Trade Organization (WTO) was established to help negotiate and establish international trade rules and to promote free trade on a global level. The WTO is run by member governments.