The Theory of Free Trade
Strategic trade theory provides a framework for understanding how countries use policies to protect their domestic markets from foreign trade and increase their domestic wealth. These policies can take different forms, but they usually involve some combination of export subsidies, import tariffs, and investments in domestic trading organisations that face global competition.
The key idea behind this theory is that trade policies can help raise domestic wealth by shifting profits from foreign to domestic trading organisations. By doing so, countries can capture more of the gains from international trade and use them to improve their domestic economies.
Accordingly, the theory emphasises the importance of trade agreements restricting anti-competitive practices such as dumping, subsidies, and other forms of unfair competition. Such agreements can help countries compete on a level playing field rather than using protectionist trade barriers to limit global free trade.
Overall, strategic trade theory provides a nuanced understanding of how countries can use trade policies to promote their economic interests while also promoting global free trade. Countries can achieve economic growth and prosperity in a globalised world by adopting policies that encourage fair competition and protect domestic industries.
The Barriers to Free Trade
Trade barriers are an intervention in markets that operate internationally through countries that may install anti-competitive practices in a variety of ways to effect trade barriers to protect their domestic markets; they include:
- Tariffs (taxes) on imports.
- Non-tariff barriers such as import quotas and trade embargoes.
- Subsidies for domestic trading entities.
- Anti-dumping duties covering imports.
- Regulatory barriers.
- Voluntary export restraints.
The comparative advantage theory states that if countries have access to resources in different proportions at differing relative costs, all nations will gain from international trade. Still, to realise those trade gains, each country needs to use the industries where domestic production is most efficient to trade for other goods in which their production is less efficient to satisfy domestic demand.
Increasing International Competition
Market distortion occurs when an event often enacted by a governing body intervenes in market pricing to the extent that the clearing price for products significantly differs from the market price that would occur within a perfect competition. An example could be subsidising farming activities through subsidies, making farming feasible economically to create artificially high supply levels and reduce agricultural product prices.
Economists tend to agree that free trade agreements positively affect international trade, and barriers to free trade negatively impact trading patterns. However, some foreign governments use trade barriers as a protectionist measure to protect their domestic economies. The recent world economic downturn following the COVID pandemic and increased competition from emerging third-world economies have further compounded these concerns.
Third-world economies’ reliance on fossil fuels continues to be a fundamental source of competitiveness, funding, and improving the trading growth of third-world economies while increasing the negative impacts on the environment through global warming.
Preferential and regional trade agreements, such as customs unions, Free Trade Agreements, and partial scope agreements, are created to remove barriers to trade between countries. They offer preferential market access on a reciprocal basis and usually cover businesses in services, products, and foreign investments. This is achieved through the removal of tariff and non-tariff trade barriers.
The Concept of Free Trade
Free Trade Agreements can also include harmonising standards to encourage regulatory cooperation, customs cooperation, and trade facilitation. Competition between trading organisations encourages product and service improvements through innovation. However, this must be tempered by utilising competition law that is designed to protect consumers, the environment, and other trading organisations from trading practices that:
- Restricts or weakens competition.
- Damages the environment.
- Limits the impact of increased costs.
- Stagnates innovation.
- Reduces either the quantity or varieties of trade undertaken.
The ability to trade internationally allows access to markets that specific countries may not have or are restricted to, such as petrochemicals from the Middle East. Middle Eastern countries have limited resources to manufacture cars, but they are among the primary consumers of the products that they (the Middle Eastern countries) have in abundance.
Free Trade Agreements
The General Agreement on Tariffs and Trade (GATT) is a legally binding agreement signed on 30th October 1947, in Geneva, Switzerland, initially by 23 countries, but within seven years to include 117 countries.
The principle aim of the GATT Agreement was to oversee a reduction of tariffs and other trade barriers with the elimination of preferences on a reciprocal and mutually advantageous basis to bolster economic recovery through global trade after WW2.
The GATT is a legal agreement between countries that functions through a body that has overseen a further eight rounds of multilateral trade negotiations. With the creation of the World Trade Organisation in 1994, there has been a reduction of average trade tariffs from 22% in 1947 to below 5% after 1994, the Doha Development trade negotiation that began in 2001 is still not completed.
The principles of the GATT Agreement include the following between signatory countries:
- Equal trading opportunities.
- Reciprocal trade rights and obligations.
- Transparency in trade.
- The commitment to reduce and equalise tariffs.
There are many free trade agreements globally, for example:
- North American Free Trade Agreement (NAFTA).
- The Central American-Dominican Republic Free Trade Agreement (CAFTA-DR).
- European Union (EU).
- Asia-Pacific Economic Cooperation (APEC).
Free Trade Sustainability
The latest Free Trade Agreement between the United Kingdom and New Zealand is a landmark agreement that emphasises environmental protection. The deal includes commitments to reduce carbon footprint, promote sustainability, and address climate change. These commitments are legally binding and cover many areas, including farming, fishing, and forestry.
The agreement made between the UK and New Zealand will have a considerable impact on the farming sector. The two countries will collaborate to decrease greenhouse gas emissions from agriculture and encourage sustainable farming methods. This is a significant development towards lessening agriculture's impact on the environment.
The agreement also includes commitments to promote biodiversity and reduce pollution. This will be achieved through measures such as reducing the use of pesticides and fertilisers, protecting wetlands, and restoring degraded land.
This agreement also significantly focuses on the fishing industry. The UK and New Zealand have agreed to promote sustainable fishing practices and reduce overfishing. They have also committed to combatting illegal fishing, a major contributor to overfishing, and protecting marine biodiversity. This will be achieved by improving monitoring and enforcement, reducing bycatch, and protecting vulnerable species.
The forestry industry is another area that will be affected by this agreement. The UK and New Zealand have committed to reducing illegal deforestation and wildlife trade. Deforestation destroys habitats, threatens biodiversity, and worsens climate change. The agreement aims to promote sustainable forestry practices, protect forests, and restore degraded land.
The Free Trade Agreement between the UK and New Zealand is a significant step towards promoting environmental protection and sustainability. The commitments made in the agreement cover a wide range of areas and aim to reduce human activities impact on the environment.
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