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What is 'Free Trade'?

Free trade is a policy to eliminate discrimination against imports and exports. Buyers and sellers from different economies may voluntarily trade without a government applying tariffs, quotas, subsidies or prohibitions on goods and services. Free trade is the opposite of trade protectionism or economic isolationism.

BREAKING DOWN 'Free Trade'

Politically, a free-trade policy may simply be the absence of any trade policies, so a government doesn't need to take specific action to promote free trade. This is referred to as “laissez-faire trade” or “trade liberalization.” Governments with free-trade agreements do not necessarily abandon all control of import and export taxation. In modern international trade, few FTAs result in completely free trade.

The 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 companies to concentrate on manufacturing goods and services where they have a distinct comparative advantage, a benefit widely popularized by economist David Ricardo in 1917 in “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.

Few issues separate economists from the general public like free trade. Research suggests that faculty economists at U.S. universities are seven times more likely to support free-trade policies than the general public. The U.S. economist Milton Friedman stated, “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, including countries it has FTAs with. Many politicians oppose free trade on the basis that certain sectors, such as manufacturing, may suffer if forced to compete with foreign producers. Although 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. They must compete with subsidies for U.S. exports. Special interest groups have successfully lobbied to impose trade restrictions on hundreds of foreign products including steel, sugar, automobiles, milk, tuna, chicken, beef and denim garments.

Free-Trade Agreements and Financial Markets

The U.S. government and the World Trade Organization publicly support greater cross-border trade in financial markets, including financial services. However, completely free trade is unlikely. 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 financial products.

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