What is free trade?
Free trade is the exchange of goods and services between countries without barriers such as taxes or limits on quantity. It encourages specialisation, so each country makes what it can produce at the lowest opportunity cost and then trades for the rest.
Key idea
Free trade widens consumer choice, lowers prices through competition, and lets countries enjoy goods they could not make cheaply themselves.
Methods of protection
When a government restricts trade to help home producers this is called protectionism. Common methods are:
- Tariff — a tax on imported goods that raises their price.
- Quota — a physical limit on the quantity of a good that may be imported.
- Subsidy — a payment to domestic firms so they can charge lower prices.
- Embargo — a complete ban on trade in a product or with a country.
Example
If a country puts a 20 percent tariff on imported steel, foreign steel becomes dearer, so buyers switch to cheaper home-produced steel.
Why protect, and the risks
Governments protect to nurture infant industries until they are large enough to compete, to save jobs in declining industries, to prevent dumping (foreign firms selling below cost), and to raise revenue from tariffs. However, protection has real costs. Other countries may hit back with their own barriers (retaliation), so exporters lose sales. Protected firms may become lazy and inefficient because they face less competition, and consumers usually pay higher prices for less choice.
Remember
- Tariffs raise price; quotas limit quantity.
- Protection helps some producers but can harm consumers and trading partners.