Benefits of Free Trade

Free trade is a trade policy that allows traders to transact business without any sort of interference or
intervention from the government. It is believed that free trade leads to mutual benefits for both the
trading partners. It differs from other forms of trade in that there is no creation of artificial prices, or
a false demand and supply of products. In a protectionist trade economy, government intervenes in
the form of subsidies, taxes, tariffs, etc to lower prices of goods or adjust supply of products. Free
trade overcomes all this and gives a true picture of the actual demand and supply. To understand
how free trade creates a better market and trade environment, lets take a look at its benefits.
1. Comparative advantage:

According to the theory of comparative advantage, countries, by specializing in goods that have lower
opportunity costs, lead to an increase in the economic welfare of all countries. The theory is self-
explanatory. Each country does what it is best in and trades with other for its needs. In this manner
the market represents true supply and demand, and trade benefits all the countries.

2. Economy of scale:

When countries specialize in certain goods that they can produce, they can take advantage of
economy of scale and produce these goods at lower average costs. This is more useful to industries
where the fixed cost of production is very high or where the investment required is very high. By
specializing in such products, the industry can ultimately gain from economy of scale and lower
production costs. This would transfer to the consumer as lower prices for the finished goods.

3. Increases healthy competition:

When demand increases from abroad, industries will respond to the demands by reducing costs and
increasing efficiency. This will prevent the creation of monopolies within the domestic market, which
lead to high prices. Thus free trade brings about a healthier competition within the domestic
industry.

4. Increases economic growth:

Trade is the greatest factor that leads to economic growth. When the trade occurs as a result of true
demand and supply, the economic growth that occurs also truly reflects the increase in economic
welfare. Thus, free trade brings about increased economic growth, which means better and more
jobs; better standards of living; etc.
5. Effective use of raw materials:

Free trade not only brings about economic growth but also effectively uses raw materials, especially
highly valuable and highly limited raw materials. For instance, the Middle East is a rich source of oil,
but there isnt much else in these countries. Trade is what ensures that this limited resource is
distributed to different countries which lack this resource and the Middle East, in turn, gets the
products necessary for their day-to-day living and business.

6. Lesser cost of living:

When governments add tariffs and taxes to protect their interests, it leads to the industries selling
products at a higher cost. This leads to higher costs of living. On the other hand, free trade does away
with government interventions such as subsidies, tariffs, and taxes. This ensures that the products
and services are efficiently produced and at a lower cost. This transfers to lesser prices for products
and thereby lesser cost of living.

7. Increased choice:

Free trade leads to increase in both exports and imports. This leads to more products being available
in the market. A consumer has the opportunity to purchase goods based on quality requirements and
budget. The consumer has more choice.

8. Good government and peaceful international ties:

Free trade prevents the need for protectionist government policies. It is such policies that lead to
corruption among the government officials. Thus, a free trade economy promotes healthier
governance. A healthy government also works towards a healthier economy. This ensures smoother
and healthier trade and political relationships between countries. Thus, free trade leads to healthier
domestic governance and peaceful international ties.

History has proven that free trade has several benefits as compared to a protectionist economy. It
has benefits for the consumer, industry, economy, and the world, as a whole.