Trade around the world is becoming increasingly barrier-free, but there are still many people who think that free trade is bad for the economy. They believe that free trade hurts domestic production, while that may be true, the advantages of free trade lead to increased competition which means better quality products at a lower price for end consumers.
Advantages of Free Trade
1. Efficiency
With free trade, domestic firms face competition from abroad and therefore there will be more incentives to cut costs and increase efficiency. Free Trade encourages an efficient utilization of scarce resources.
2. Specialization
Free trade leads to specialization, where a country only produces goods that they are efficient at, i.e., in which they have a lower opportunity cost. Specialization leads to higher levels of output.
3. Consumption
Free trade enables an increase in consumption as countries can consume combinations of goods outside their production possibility curve.
4. Market Power
Without trade barriers, free trade decreases the market power of monopolies as they are competing at a global level. It may also prevent domestic monopolies from charging too high prices.
5. Price
Local firms now have to compete against firms from all across the world, especially online. Competition is a win for consumers who can enjoy the lowest prices.
6. Technology
Technology can cross over borders more easily with free trade, and this often accelerates improvements in technology.
7. Economies of Scale
If countries can specialize in certain goods they can benefit from economies of scale and lower average costs, this is especially true in industries with high fixed costs. The benefits of economies of scale will ultimately lead to lower prices for consumers and greater efficiency for exporting firms.
8. Variety
Variety provides consumers with a greater variety of goods as they can gain access to products from different countries. This variety of choice leads to lower prices too.
9. Growth
Free trade leads to higher economic output as an increase in demand for local goods results in higher exports. This in turn creates more jobs for the local economy and the country enjoys higher economic growth.
Openness in Goods And Financial Markets
One of the ways to measure the openness in goods and financial markets is through the Measure of Openness is the ratio of exports to GDP. In the USA, the measure of openness is 11%. Another measure is the ratio of exports to tradable goods. Tradable goods are goods like cars and computers, but exclude goods such as houses and haircuts. Sixty percent of the total GDP is tradable goods.
Openness in Goods Markets
The ability of consumers to choose between domestic and foreign goods. No country has a completely open economy. Most countries resort to tariffs, quotas, and other types of restrictions.
Openness in Financial Markets
The ability of investors to choose between domestic assets and foreign assets. Most countries are trying to eliminate capital controls and move towards open capital markets.
Openness in Factor Markets
The ability of firms to choose where to operate and the ability of workers to choose where to work. Countries try to have free trade areas. However, movements of plants and labor have resulted in heated political debates in most countries.