BENEFIT OF FREE TRADE

BY IZZATI NADHIRAH, SITI NURFATIAH AND NURILI FARZANA

According to Graham Dunkley (2004), free trade is usually defined as the absence of government restrictions upon the cross-border flows of goods or services, with minor regulation allowed, although as a result of the growing trade obsession, an increasing number of policies are now being deemed trade-restrictive and slated for liberalization or abolition. Overall, free trade is trade between countries without any restrictions. Free trade is exemplified by the European Economic Area and the North American Free Trade Agreement (NAFTA), which have established open markets in world. 

Theory of comparative advantage developed by David Ricardo states that if each country produces what it does best and allows trade, all will realize lower prices and higher levels of output, income and consumption than could be achieved in isolation. When Ricardo formulated his theory, major factors of production could not move to other nations. Yet in today’s world, important resources such as labor, technology, capital and ideas often shift around the globe through free trade.

Creating new and better foreign relation is usually an unintended result of free trade. Free trade will increase the national income of the country. The more the free trade with other countries, the national income of country obtained. Countries can involve in free trade to improve business opportunities. Other than that, free trade will help the rising in economic growth of country. The economic growth of country that is related with free trade will create more job opportunities in country. Then, the demand of labor will increase and indirectly will increase the economic growth.

 If countries can specialize in certain goods, they can get benefit from economies of scale and lower average costs of production. This is especially true in industries with high fixed costs or that require high levels of investment. The benefits of economies of scale will ultimately lead to lower prices for consumers and greater efficiency for exporting firms. Free trade allows companies to lower their business costs by using the cheapest economic resources available. Traditionally, free trade allows companies to import raw materials for producing business goods domestically.

Free trade improves economic performance by increasing competition in the domestic market. Trade disciplines domestic firms with market power. Free trade improves economic performance not only by allocating a country’s resources to their most efficient use, but by making those resources more productive in what they are doing. . In other words, free trade promotes productivity growth. The higher is an economy’s productivity level, the higher is that country’s standard of living.

As a conclusion, free trade was beneficial to society. Thus, countries that allow free trade will gain the greatest benefits that will affect the economic situation of their country. Free trade can be beneficial and very important in generating economic growth of a country. However, weaknesses in free trade can be avoided by running and planning a good policy in order to prevent consumers and producers in the country feels threatened.