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What does 'Free Trade' mean

Free trade is the economic policy of not discriminating against imports from and exports to foreign jurisdictions. Buyers and sellers from separate economies may voluntarily trade without the domestic government applying tariffs, quotas, subsidies or prohibitions on their goods and services. Free trade is the opposite of trade protectionism or economic isolationism.

BREAKING DOWN 'Free Trade'

Politically, a free trade policy may just be the absence of any other trade policies; the government need not positively do anything to promote free trade. This is one reason it is sometimes referred to as “laissez-faire trade” or “trade liberalization.” Governments with free trade agreements (FTAs) do not necessarily abandon all control of taxation of imports and exports. In modern international trade, very few so-called FTAs actually fit the textbook definition of free trade.

Economics of Free Trade

In a free trade regime, both economies can experience faster growth rates. This is no different than voluntary trade between neighbors, towns or states. Free trade enables domestic workers to concentrate those goods and services where they have a distinct comparative advantage, a benefit widely popularized by economist David Ricardo in his 1817 book “On the Principles of Political Economy and Taxation.” By expanding the economy’s diversity of products, knowledge and skills, free trade also encourages specialization and the division of labor.

Very few issues separate economists from the general public like free trade. Research suggests faculty economists at American universities are seven times more likely to support free trade policies than everyone else. As American economist Milton Friedman once explained, “the economics profession has been almost unanimous on the subject of the desirability of free trade.” Despite this, experts have largely been unsuccessful in efforts to promote free trade policies.

Free Trade and the United States

The United States does not have genuine free trade with other countries, even those countries with which it has an FTA. Many politicians oppose free trade on the basis that certain sectors, such as the U.S. manufacturing sector, may suffer if allowed to compete with foreign producers. Even though consumers face higher prices and fewer choices under protectionist policies, movements to “buy American” typically generate widespread support.

Non-American sellers face barriers to entry and tariffs on imports, and must compete with subsidies for U.S. exports. As of 2016, special interest groups have successfully lobbied to impose trade restrictions on hundreds of foreign products including steel, sugar, automobiles, brooms, milk, tuna, chicken, beef and denim garments.

Free Trade Agreements and Financial Markets

The U.S. government and the World Trade Organization (WTO) publicly support greater cross-border trade in financial markets, including financial services. However, textbook free trade does not exist there either. There are many supranational regulatory organizations for financial markets, such as the Basel Committee on Banking Supervision, the International Organization of Securities Commission and the Committee on Capital Movements and Invisible Transactions. Increased access to foreign financial markets provides U.S. investors with a wider range of securities, currencies and other financial products.

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