What this lesson teaches
I can define free trade and weigh its advantages and disadvantages.
Syllabus K343, 6.1.2. Free trade: definition of free trade; advantages and disadvantages of free trade
Make a guess
Tariffs on imported clothes are removed. Which group in the importing country is most likely to lose?
- Shoppers who buy clothes.
- Workers at local clothing factories.
- Shops that sell imported clothes.
Show the answer
Workers at local clothing factories.
Cheaper imports take sales from local makers that cannot compete, so some close and their workers lose jobs.
Free trade means trade between countries without barriers such as tariffs and quotas.
Free trade is international trade without government restrictions, such as tariffs or quotas. International trade is the exchange of goods and services between countries.
Advantages: consumers get lower prices and more choice. Firms can sell to larger markets, gaining economies of scale. Competition from abroad pushes domestic firms to become more efficient. Firms can buy cheaper raw materials and parts.
Disadvantages: domestic firms may be unable to compete with cheaper imports, so they close and workers lose jobs. Countries may become dependent on others for important goods. Free trade may allow the import of harmful goods, or goods made under poor working or environmental standards.
Free trade agreements reduce barriers between member countries. Singapore has many such agreements, which suits a small economy that depends on exports.
- Free trade
- Trade between countries without restrictions.
- International trade
- Exchange of goods and services between countries.
- Gainers
- Consumers, exporters, efficient firms.
- Losers
- Uncompetitive domestic industries and their workers.
Worked example: Free trade for a small, open economy
Singapore's total trade is worth more than three times its GDP.
- Exports: firms sell to markets far larger than Singapore's own.
- Imports: consumers and firms buy food, energy and parts it cannot produce.
- Free trade agreements keep the tariffs on its exports low.
- Risk: a global downturn quickly reduces orders for its exports.
Watch out for this
Free trade always benefits every group in a country.
Consumers and exporters usually gain, but workers and firms in industries that cannot compete with imports can lose.
Check your understanding
Two countries scrap tariffs on each other's goods. Which gain is most likely for consumers in both?
- Lower prices and a wider choice of goods
- Higher wages in industries facing new imports
- More tariff revenue for both governments
Show the answer
Lower prices and a wider choice of goods
Right. Cheaper imports and new products from the partner country benefit buyers in both.
Check your understanding
Which is the most likely benefit of free trade for consumers?
- More tariff revenue for the government
- Protection of local jobs from imports
- Lower prices and more choice
- Higher wages in every industry
Show the answer
Lower prices and more choice
Right. Imports compete with local goods, so prices fall and the range of goods grows.