What Are the Advantages & Disadvantages of Free Trade?

"Free trade" refers to the exchange of goods and services between countries free of government interference, particularly import quotas, government subsidies and protective tariffs, or taxes imposed on specific imports to shield domestic industries from direct competition. The general trend since World War II has been toward more free trade in the form of international treaties signed by nearly all nations, as well as agreements between specific countries. Free trade has advantages and disadvantages -- and often they are two sides of the same coin.

Advantage: Specialization

Just about every country needs cars, to take one example, but not every country needs to produce them. Every country has "comparative advantages" -- things that it can just do better than others. When there are no barriers to trade, a country is free to concentrate its economic activity on those things, and it can sell those products or services to the rest of the world. It can then import other products and services from countries that can produce those things most efficiently.

Disadvantage: Specialization

The flip side of specializing in certain sectors is a dependence upon those sectors. A country may be good at making widgets and may focus its industrial base on becoming the world's best widget supplier. Everything works well until another country makes a widget just as good. Or, worse, technological innovation means the world suddenly doesn't need widgets at all. Where such a development may once have harmed one segment of the economy, even a large segment, now it can have catastrophic effects on the entire economy.

Advantage: Competition

Competition tends to lower prices and increase quality. No longer protected by tariffs and other trade barriers, companies -- and entire industries -- must become more nimble, more innovative and more responsive to consumer needs. Rising to a challenge from abroad can strengthen a domestic industry. The arrival of Japanese cars in the 1970s , for example, eventually forced U.S. automakers to improve quality.

Disadvantage: Competition

In every competition, there will be winners and losers. "Losing" means lost jobs, closed factories and devastated communities. "Winning" also might mean lower wages and less security for workers, even though that's what it may take to ensure a lower cost for a particular product. Supporters believe free trade grows the overall economic pie, but not without some displacement and pain.

Advantage: Interconnectedness

The people of Western Europe spent centuries fighting each other over politics, religion, land and whatever else caused conflict. In the years after World War II, the nations of the region began laying the foundation for the European Union -- and peace has endured ever since. Free trade binds countries together so closely that armed conflict becomes too costly. It also tends to stress shared values -- including, often, democracy -- further reducing the likelihood of war.

Disadvantage: Interconnectedness

When economic barriers are swept away, capital and jobs are free to cross borders. Industries can shift production from high-cost countries -- those with good wages and strong worker protections -- to low-cost countries, where low wages are the rule and labor, health and environmental protections are slim.