Tariff-free trade refers to the ability of countries to import and export goods without incurring tariff barriers.
In essence, free trade enables consumers to pay less, has an impact on exports, and benefits from economies of scale.
Specifically, free trade has the following benefits:
Assume that. Competitive advantage is a theory
By concentrating on goods where countries have lower opportunity costs, the economic well-being of all countries can increase. Countries that have a comparative advantage in certain goods can specialize in those with free trade.
The second paragraph. Reduced tariffs lead to increased trade
When consumers switch from high-cost producers to low-cost producers, trade is created.
Three. An increase in exports
Consumers who import goods as well as firms exporting goods where the UK has a comparative advantage will benefit significantly. Exports from the UK will increase as tariffs are lowered, boosting the country’s jobs and economic growth.
Four. Cost-savings by scalability
Economies of scale and lower average costs are possible when countries specialize in certain goods; this is especially true for industries with high fixed costs or investing heavily. Consumers will benefit from economies of scale by lower prices and exporting firms will become more efficient.
Five. An increase in competition
Trade will increase competition between domestic and foreign firms. The cost-cutting and efficiency-enhancing effects will therefore be greater. Domestic monopolies may be prevented from charging too high prices as a result.
The sixth point. Growth comes from trade.
Averaging 7% growth in world trade since 1945, this has been a major contributor to economic growth.
Seven. Utilize excess raw materials
Despite having big oil reserves, Middle Eastern countries such as Qatar would not benefit much from them without trade.
However, Japan has very little raw materials; without trade it would have a low GDP.
Eighth. Taxes can lead to inefficiency
A country that increases tariffs to protect its domestic industry may prevent industries from cutting costs.
An economist’s perspective on free trade
A general supporter of free trade, Adam Smith argued that countries should specialize in their areas of expertise. According to him, protecting the Scottish wine industry does not make economic sense if it would cost 30 times the price of importing wine from warmer countries. Smith pointed out that if our competitors became more prosperous, they would buy more of our exports. He believed trade would make everyone more prosperous. Mercantilist theories of the time held zero-sum outcomes.
A rich nation is like a rich man who is more likely to buy from the industrious people in his neighborhood than someone who is poor. In their effort to impoverish all of our neighbors, trade restrictions have the unfortunate effect of making the very thing they restrict insignificant and worthless.”
p.495, para. 1 of Book IV, Chapter III, Part II, Wealth Of Nations. Chapter 11.
Buying a commodity that can be produced cheaper by a foreign nation is preferred to buying it with our own produce, used in a way to our advantage.
Chapter II, Book IV, The Wealth Of Nations, [link]
A Study of Economic and Fiscal Policy by David Ricardo. As far as the theory of comparative advantage is concerned, Ricardo made his case in 1817. The aim of Ricardo’s argument was to show that removing tariffs would lead to a net gain in welfare – consumers would gain more than producers would lose.