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What is Free Trade?

Mary McMahon
Updated May 16, 2024
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Free trade is a system in which goods, capital, and labor flow freely between nations, without barriers which could hinder the trade process. Many nations have free trade agreements, and several international organizations promote free trade between their members. There are a number of arguments both for and against this practice, from a range of economists, politicians, industries, and social scientists.

A number of barriers to trade are struck down in a trade agreement. Taxes, tariffs, and import quotas are all eliminated, as are subsidies, tax breaks, and other forms of support to domestic producers. Restrictions on the flow of currency are also lifted, as are regulations which could be considered a barrier to free trade. Put simply, free trade enables foreign companies to trade just as efficiently, easily, and effectively as domestic producers.

The idea behind the concept is that it will lower prices for goods and services by promoting competition. Domestic producers will no longer be able to rely on government subsidies and other forms of assistance, including quotas which essentially force citizens to buy from domestic producers, while foreign companies can make inroads on new markets when barriers to trade are lifted. In addition to reducing prices, free trade is also supposed to encourage innovation, since competition between companies sparks a need to come up with innovative products and solutions to capture market share.

Free trade can also foster international cooperation, by encouraging nations to freely exchange goods and citizens. Agreements between trading partners can also promote educational advantages, such as sending engineers to train with people in the top of the engineering field in one nation, or sending agriculture experts to rural areas to teach people about new farming techniques and food safety practices.

Opponents often argue that it hurts domestic producers by opening up competition to companies which operate in nations with less stringent labor laws. In the European Union, for example, there are specific rules about working hours, fair rates of pay, working conditions, and so forth, which drive up the cost of production for companies which operate in the European Union. By contrast, labor laws in many developing nations like Honduras are much more lax, allowing companies to produce products at low cost, because they have low overhead costs.

Free trade has also raised concerns about product safety among some consumer advocates. A series of scandals in the early 21st century involving tainted food products from China highlighted the issue of purchasing goods from countries with inefficient or incomplete regulatory systems. Other people have suggested this type of trade encourages companies to relocate, because when barriers to foreign trade are lifted, domestic companies have no reason not to move operations overseas to take advantage of cheaper labor, inexpensive supplies, and lax regulatory systems.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments

By anon998375 — On May 29, 2017

Free Trade seems to take the nature of any general and basic thing in life. It has its disadvantages and advantages at the same time. It is said to benefit only those in the government and other business men but they are also a part of this planet and if not corrupt they can also aid their counterparts.Who are the poor people? Those who cant work with their own hands or the underprivileged? I believe free trade is a fair chance for every human being on this planet who has the right mind to use their senses to help their economy and not be corrupt nor selfish.

By anon347605 — On Sep 08, 2013

Does free mean no restrictions on the flow of labor, capital, goods, services and technology?

By anon302056 — On Nov 07, 2012

Does Free Trade system really help the two countries?

By anon270643 — On May 23, 2012

That's why the plan includes reducing the world's population while controlling resources, food, currency and the media. People need to stop arguing with each other and focus on whats happening so we can come together as one body and prevent it as a whole, but as long as the truth is blurred and the TV stays on, well we're like zombies and no one is going to prevent anything.

By anon265134 — On Apr 30, 2012

For whoever posted in post 4, you really should stop dissing people. I see you think America is great, but if everyone lives like an average American, the Earth will not be able to sustain us. Oh, and I'm also sure Canada can do what you said in your intro.

By anon182590 — On Jun 02, 2011

Free trade fair trade no trade, who cares ? Who does it all profit? but governments and business people. The little guy just keeps his head above water and it has been that way a long time. Even with a vote it makes little difference, because the poor just keep getting poorer. It is cycle that will not end any time soon. It has been this way all through history. There is always someone at the top and then someone at the bottom.

By anon122679 — On Oct 28, 2010

Both of you are full of crap. The earth can sustain everyone living like Americans. I have heard people like you two for years, saying free trade will kill the planet, and those dirty americans. Show me a place where you are free to worship any god or no god at all. Show me a place where an ignorant black man with no experience as a statesman and no breeding can become the most powerful man on the planet. The answer is nowhere but America.

If you would stop postulating and get a job you might figure out that the American dream would make the planet the most peace-loving, forward thinking, dream rewarding free place in the galaxy. Believe me, it isn't Cuba that has lead the way in innovation and technology. No guys, the Cubans live like master and servant and so do China, Russia, Spain (now that the Islamic fundamentalists rule there and France), North Korea. You guys think free trade got us where we are now? What got us here is government tinkering with something it knows nothing about: freedom.

Our government has become corrupt and evil and we need to clean house and get back to the Constitution. Social justice is evil wearing a happy face. Political correctness is of and for the Soviet Union. We cheat ourselves by talking around problems and not getting at them, just like you two, thinking our innovation, spirit and ingenuity couldn't resolve issues that would come up, making everyone on the planet free, happy and living like Americans.

You know, people are not floating across the Atlantic in rafts to make a new life in Africa. We can overcome anything with the great minds being stymied in countries like Cuba and Mexico and really most other countries around the world. I'll bet if you asked the average Persian if he wants the freedom afforded in America or to stay in Iran under a repressive regime, well yeah, even the folks under the Taliban would choose damn near anything but Taliban rule.

Communism and socialism have failed, and georgesplane, this is a representative republic, not a democracy. Alchemy? The problem with your argument is simple: you are wrong. The reason companies produce overseas is simple: we have taxed and regulated them to death. We have let the jackasses run the farm. The unions have destroyed this country, and we have people like you to blame.

I'm sure you wanted more regulation in the gulf and screamed for no more drilling in Alaska. Well, the whole reason we purchased Alaska was to exploit the natural resources there: the animals, the gold. the oil and natural gas. Man, you can't have it both ways. You can't have no domestic oil industry and then complain about what we get from the Middle East, including wars to protect our interests there.

You voted for candidates who swore they wouldn't touch the Gulf or Alaska. You don't believe in free trade or capitalism or America. I'm not sure what you believe, except I'm glad i don't feel as you do. God, what a horrible future prospect you must have and how nice is it to sit in your high places and look down your noses at all the little peasants running around and being so useful.

No thanks. I'll take my flawed systems and push 'em out like big macs and Coca-Cola, driving a big shiny Cadillac and living in a 5,000 square-foot house with the a/c running at 55 degrees and the windows open. Long live conspicuous consumption.

By Alchemy — On Jun 08, 2010

I am against theoretical free trade, but for different reasons than Georgesplane. Free trade is a direct contradiction to the premise of government. Government’s job, believe it or not, is to ensure the security and well-beings of its citizens. This means creating regulations on labor, pollution, national defense, and almost every other aspect of life. Free trade on the other hand is based on the premise that laws governing national security, workers rights, and the environment are considered restrictions. Firms try to establish a presence and exploit the resources in many different nations. Government, on the other hand, looks to protect its borders and everything within them. Self-regulation by companies is also an invalid argument because it would be based on the perception of what is moral and ethical to many different private entities. There would be no collective thinking because free-trade is about competition.

Here's an example of what I mean. One of the biggest incentives for some industrial firms to establish production in other nations is because of regulations on clean air, water, and preservation of biodiversity. The costs of meeting the regulation requirements in the U.S. can be too much for some firms that sell their products based on price; rather than brand strength and competitive advantage. They may move their production operations to a country that does not have a government and scientific community established enough to recognize the importance of these types of regulations. The fact that the consumers of these goods are not exposed to the realities of these foreign regulations relative to our own, means that these companies do not have to be as concerned with their public perception of their ethical, environmental, and social responsibility. Essentially free trade would only be truly free without any sort of regulation that directly or indirectly affects the price per unit of a good. This includes any laws meant to protect life, liberty, and the pursuit of happiness. It all boils down to the ideological battle between true democracy and true capitalism. The answer is a middle ground somewhere between the two; otherwise both ideologies are impractical.

By Georgesplane — On Jun 08, 2010

Free trade is based on unregulated consumption, while the fact is there is only one planet. All the earth’s resources are finite, so unless humans can begin importing natural resources from other planets, the un-sustainability of free trade would grow exponentially with the global population and its increased consumption. This would eventually disprove the theory of free trade. Governments inadvertently act as regulators of global sustainability. The sad truth is the earth could only sustain about one fifth of its current population if everyone lived like Americans. While free trade would ultimately make a select few conglomerates wealthy, it would severely drive down the GDP of industrialized nations while marginally increasing the GDP of developing nations. Basically the planet could sustain the current population, if everyone lived on a GDP per capita similar to that of Cuba. This means that everyone in the industrialized nations would take a serious pay cut (to somewhere in the range of $9,700 per year), or there would be a rebalance of wealth that favored nations with the most resources. Sorry to say that would not be this country. I am for intelligently regulated trade that maintains our rich history of American ingenuity.

Mary McMahon

Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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