Free trade requires that the interchange of goods and services between countries occur without government restrictions or duties. In its purest form free trade would allow imports and exports to flow without hindrance. As a practical matter, however, some reduced tariff barriers and currency restrictions may remain in force. In addition, some countries may enact other barriers that may be hinder trade, such as import quotas, taxes, and subsidizing domestic industries. Regardless, free trade brings several benefits to businesses and consumers.
Availability of Higher-Quality Goods and Lower Prices
Free trade grants Americans access to lower-priced goods manufactured in other countries. According to Donald Boudreaux, a senior fellow at George Mason University, free trade has a positive effect on inflationary pressure in the United States. It does so by holding down prices by about two percent for every one percent share of the market that’s held by products produced in low-income countries.
Reduction In American Production Costs
A portion of imports represents raw materials inputs to production for American producers, rather than end products, according to the United States Census Bureau. As a result, American manufacturers' costs of production benefit from the imported input goods, which are less costly than those produced domestically. This decrease in the cost of input goods reduces the production costs of American companies, and lowers product costs for American customers. In turn, the cost savings promotes economic growth.
Improves Market Efficiency and Spurs Innovation
Free trade encourages innovation by forcing manufacturers to compete with the best the global marketplace has to offer. Companies shift their resources, including workers, to make production lines and processes more efficient to compete with lower-priced imports in domestic markets. As a consequence, Boudreaux says wages rise, as does investment in infrastructure and other assets that contribute to a more dynamic economy. As the economy grows, new jobs and business opportunities become available.
Encourages Businesses to Become More Competitive
Free trade influences customer needs and wants and, therefore, the domestic product and service requirements met by American manufacturers. Businesses revise their plans and strategies to adapt to the changes in demand in the domestic and foreign markets. As a result, the businesses may become more competitive, and perhaps experience long-term growth.
Promotes Equal Treatment of Trading Partners
In the absence of free trade, large and well-connected companies and industries can acquire unfair advantages, including the ability to take advantage of tax loopholes. The implementation of free trade diminishes the opportunity for particular nations to offer trade advantages to favored individuals or companies.
Billie Nordmeyer works as a consultant advising small businesses and Fortune 500 companies on performance improvement initiatives, as well as SAP software selection and implementation. During her career, she has published business and technology-based articles and texts. Nordmeyer holds a Bachelor of Science in accounting, a Master of Arts in international management and a Master of Business Administration in finance.