Free Trade Essay

1764 WordsMay 13, 20138 Pages
Free trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports) or quotas. According to the law of comparative advantage, the policy permits trading partners mutual gains from trade of goods and services. Under a free trade policy, prices emerge from the equilibration of supply and demand, and are the sole determinant of resource allocation. Tariffs and non-tariff barriers * The most common characteristic of free trade is the lack of state tariffs on imports. A tariff is a tax placed on incoming goods by the host country. it makes foreign goods, therefore, artificially more expensive than domestically produced goods, giving the latter a competitive edge. Other barriers to international trade such as quotas on imports or subsidies for producers are also eliminated. In addition, policies which distort a market are discouraged. Any policy that can alter the price of goods and distort comparative advantage hinders free trade. Such policies include government subsidies, regulations, trade laws and taxes. Markets * Markets, not the state or even powerful economic actors, are empowered to make decisions in free trade systems. If foreign goods are priced according to market norms, then the winner in economic competition is who makes the best product at the lowest price. In protected trade, it often is the actor with the most political power who gets its economic interests protected. States * Free trade takes the state out of the economic equation. States are disempowered to make any kind of economic decision concerning the global economy. Consumers and companies are then empowered to make these decisions based on their preferences rather than state policy. Contracts * Markets are based on contracts between buyers and sellers. Therefore, the removal

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