Free trade has long been argued to increase everyone’s wealth. President Donald Trump, most notably, has attacked that view recently. There are some serious questions on economists’ minds. What are the benefits of free trade? As time passes, trade has become increasingly more than just trading in final goods-newspapers versus wine-but also “intermediate” goods. Consider cars. A car is made up of so many parts. In recent years, we have seen an increasing number of parts made in France, Germany, Japan, and so on. After being combined in Britain, they can be shipped around the world. Nations can specialize in what they are good at even for a complex thing like a car.
Markets grow as a result of trade. You have a very limited market if you produce just for one country. Trade allows you to sell items to customers all over the world. Therefore, it makes sense to invest large sums of money in research, whether it be for self-driving vehicles or anything else. Investing in such a way spreads out the costs so we encourage more innovation, which is crucial to increasing national income.
The pie gets bigger with free trade. But that doesn’t mean everyone benefits from it. Some are left out
Third, companies have different productivity levels. Some companies are very productive, and others are not. There is a lot more competition when there is trade. Besides competing with other domestic firms, domestic firms must also compete with international firms. They shrink and exit the market as a result of more competition. Others adapt. Innovative companies can grow. Therefore, it is about shifting resources from unproductive to productive firms through creative destruction.
Politics is the last benefit economists often overlook. You are more likely to meet foreign companies, new ideas, new people and so on as a result of free trade. It benefits both parties. It also serves as an incentive to cooperate. Europe is a good example. There have been fewer trade barriers in those countries since the second world war, and that period has coincided with unprecedented peace and cooperation.
Do you want compensation? MIT economist John Van Reenen spoke to The Economist about the basics of free trade. Some details have been clarified.
What is free trade at its most basic level?
Van Reenen: Free trade means the movement of goods and services across countries with the least amount of restrictions. In the course of time, countries began making and trading goods within their borders. Then they were able to buy and sell goods abroad as transport improved. But trade barriers remained for a long time. Levying heavy import duties on things coming in from abroad was easier at a time when governments had difficulty raising taxes from their own people. However, economists eventually prevailed, arguing that keeping those barriers low was sensible.
Free trade gives you the chance to meet foreign companies, new ideas, and new people
What is the effect of free trade on economic growth?
According to me, there are four main benefits. In the early 1800s, David Ricardo introduced the first one. A country can specialize in what it does best. French wine is very good, whereas British wine is not so good. On the other hand, the British produce The Economist quite well. British wine would need to be produced and consumed entirely on the island without trade. The French will exchange wine for more copies of The Economist if Britain and France trade. The concept of comparative advantage is sometimes used to refer to this.