Free Trade, Free Movement Of Goods And Services
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
Free trade has existed from the time man learned to barter, much before the concept of actual money and currency materialized. Now, it refers to the movement of goods and services within and outside a country without government regulations. Free trade opposes government restrictions which hinder free trade.
Examples of common government restrictions are:
Table of Contents
History of Free Trade
Adam Smith, the father of modern economics, became the world’s first economist to propound the concept of free trade. Other eminent economists joined ranks with Smith and they were John Maynard Keynes and David Ricardo.
In 1947, the formation of General Agreement on Tariffs and Trade (GATT) marked a significant step to boost global trade but its role was taken over by the World Trade Organization (WTO) in 1995.
Free Trade and World Trade Organization (WTO)
Promoting free trade between countries is what WTO works to accomplish. Some of its main functions are to:
- Review operation and administration of trade agreements.
- Serve as a platform to negotiate and settle disputes between trading nations.
- Review trade policies of different nations to establish transparency and uniformity.
- Provide trade assistance to developing and under-developed countries, through technical training.
- Conduct periodical assessments of global trade.
- Research and publish annual reports on world trade.
In addition, the WTO works with the World Bank and the IMF to ensure greater efficiency.
How Free Trade Works
Signing a free trade agreement is the first step towards facilitating and strengthening free trade. Typically, two countries sign the agreement.
Specific regions of the world have also made a collective attempt to create free trade areas for their economic growth. Examples include the African Free Trade Zone (AFTZ) and the European Economic Area (EEA).
Reasons to Support Free Trade
Reasons to advocate free trade are as follows:
Economic Reasons:
- Economists with classic views propound free trade for economic growth.
- Their view is that free trade increases the level of output in the world economy by promoting specialization.
- Free trade also lowers prices in an economy by encouraging competition.
Moral Reasons:
- This is the libertarian view pertaining to some intellectuals belonging to the 18th and 19th century.
- Their view is based on moral grounds as they believe trade restrictions are immoral.
- Trade barriers also restrict consumer rights.
- Free trade between nations reduces vulnerability to wars.
Limitations of Free Trade
Limitations of free trade include:
- The WTO is criticized for favoring large corporations.
- Protectionism is apparent in some form or the other. Modern free trade policies are not entirely free from barriers.
- Many governments and bureaucratic agencies of different countries act as trade negotiators. They impose heavy taxes and tariffs to increase their profitability.
A collective global movement towards free trade can propel great economic prosperity and global cooperation for trading nations.
