What is free trade?

We explain what free trade is and what are the advantages and disadvantages of this commercial dynamic. What is protectionism?

  1. What is free trade?

When we talk about free trade or free market, we refer to a commercial dynamic governed by the so-called laws of supply and demand , that is, by the factors that participate in the market, with the least forms of State intervention as a regulatory entity . In other words, it is an open business situation, in which transactions are poorly controlled through taxes, restrictions and other artificial obstacles.

Free trade is one of the main flags of liberalism , a social, political and economic current born around the Bourgeois Revolutions that marked the entry of the world into the Modern Age (XV-XVI centuries). The defense of economic freedoms (of prices, hours of sale, participation in the market, etc.) went against the doctrines that advocated the intervention of a strong state (protectionism).

These situations are governed by the “invisible hand of the market,” according to liberal theories , which is nothing more than the balance between the supply of goods and services producers, versus the demand from consumers . In principle, these two forces would have to build a stable and self-regulated market, free of situations that artificially favor one sector or another , as in monopolies, oligopolies or in situations of state protection.

The doctrines of free trade apply both to the internal trade of a country, and to the external or international exchange of a region or of two associated countries.

  1. Free trade agreements

Free Trade Agreements (FTA) are international, regional or continental associations between two or more countries that decide to trade in the most open way possible, without tariffs, trade barriers or other obstacles that could limit the flow of goods and the services between their territories.

The first FTA in history was signed in 1891 and was the Treaty of Cobden-Chevalier between Great Britain and France. Since then many more have emerged, especially in the framework of the integration of countries whose regions historically tend to mutual aid. Some examples are the Pacific Alliance, the now extinct Free Trade Area for the Americas, the North American Free Trade Agreement, the Chile-United States Free Trade Agreement or the MERCOSUR Free Trade Zones, the Andean Community of Nations or the European Union.

  1. Advantages of free trade

Free trade advocates are based on the following virtues of the model:

  • Generate codependence . The nations that trade freely become dependent on each other and strengthen commercial and diplomatic ties, thus going against the emergence of wars .
  • Promotes comparative advantage . That is, countries tend to specialize in goods that are more efficient in producing and exporting, thus being able to import goods in which they are not as efficient at a relatively good price. This would mean an improvement in the quality of life of the country .
  • It does not distort trade . It allows the emergence of international trade dynamics free of tariffs and other mechanisms that interfere with their “natural” dynamics .
  • It allows regional growth . It enriches regions that freely trade with each other, as opposed to the ordinary international market.
  1. Disadvantages of free trade

Free trade
Commercially robust countries can flood local markets that fail to match them.

Many oppose Free Trade Agreements based on the following accusations:

  • It favors the powerful . Commercially more robust countries can benefit from state non-intervention in the foreign trade balance, flooding local markets since national production fails to compete on equal terms.
  • It generates vertiginous changes . Especially in workers’ ways of life and work , which can result in future and unpredictable crises.
  • It does not benefit workers . In cases of not being accompanied by a free movement of workers.
  • Migrate employment . Especially when it comes to more developed nations exploiting smaller nations, industries and businesses tend to move where there are more favorable conditions and this often destroys employment.
  1. Protectionism

The doctrine against free trade is known as protectionism . In it, the State is called to play an active role in the regulation of the commercial rate, applying barriers and taxes to import or export, in order to shape or control the way in which these processes occur. This would produce advantageous situations for local industry and provide the State with profits from international capital , defending the local economy from a possible avalanche of goods and services from other countries.

Protectionism emerged as a contrast to the liberal positions in the nineteenth century and again in the twentieth century, but this time from the development sectors of the left and progressivism, which perceive the global market as a source of inequality and poverty for the least favored countries.

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