In 1948, the General Agreement on Tariffs and Trade (GATT) was formed, in Havana, the Cuban capital. An agreement was signed between twenty three countries to reduce customer tariffs. This organization which is based in Geneva helps promote free trade by persuading countries to abolish import tariffs and other barriers to open markets. This article analyses the advantages and drawbacks of free trade.
Advantages of Free trade:
- Increase in imports and exports
Decrease in trade barriers reduces the prices and increases the quantity of imports. Citizens of a country can take advantage of imported products at a comparatively lower price. This encourages individuals to buy the product thus increasing a market for the product. Similarly initiatives taken by the government to reduce trade barriers can lead to better relations among other countries who will in turn rely on that state for goods where they have a comparative advantage
- Advantage due to competition
An increase in trade leads to increased competition for local companies from foreign companies. This can drive domestic companies to improve their standards to retain their market share. This contributes to the growth of the economy as there is an overall rise in the efficiency
- Benefit from economies of scale
As the volume of goods produced increases the average cost decreases. This is known as economies of scale. Countries that specialize in the production of certain goods can be at an advantage because of economies of scale. The ultimate advantage of this is to the consumer who pays less for the goods bought
- Excess raw materials can be put to productive use
An agricultural country like India can export the surplus produce and generate earnings and at the same time see that the surplus produce does not get wasted. On the other hand, a country that is poor in the production of natural resources for example: Japan can export its surplus technological and industrial products. Therefore free trade encourages exchange of surplus produce between countries
Disadvantages of free trade:
- Decline of local industries
Free trade creates competition among domestic industries and foreign industries. This leads to insecurity for the local suppliers. For example: the textiles supplied by China to Europe are lower in price than those produced locally. This naturally increases the demand for Chinese textiles. This is a reason to worry for the domestic industries that stand to lose their market share
If the industry is relatively new, it would have to struggle more against the international competition. If the industry is declining, free trade does not allow it a chance to reinvest and rebuild the business to make it profitable again
- Disadvantage of dependence on agricultural produce
Industralized nations depend on other countries for large quantities of agricultural goods. The elimination of tariffs or quotas further encourages them to rely on other countries for these goods rather than finding ways to become more self-sufficient. The disadvantage for these countries is that the price of agricultural products can fluctuate depending on the changes in environmental conditions
- Losing the cultural identity
Many countries see the rise in demand for foreign products and services as a threat to their culture. They think that this demand can lead to a change in the lifestyle resulting in commercialization of their countries. For example, when Walt Disney wanted to enter the European market with Euro Disney, they faced opposition from local people as they saw it as an attempt to Americanize their culture
- Drawbacks of comparative advantage
Comparative advantage can get nullified if the transport costs add up to make the goods expensive. Comparative advantage does not measure future possibilities. For example a country can become a specialist in producing goods that it does not have expertise in, if there is sufficient investment of capital and human resources
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