Free Trade

Exchange of goods, services, and assets across national boundaries with very little or no inter ruption. In politics, as well as economics, there is nothing like absolute freedom. This means that to obtain the maximum or optimal benefit from trade, only the nec essary safeguards or restrictions should be considered in economic relations. Excessive restrictions inhibit improvement on general welfare because they sustain prices above the market clearing rate, limit consumption, promote inefficiency, discourage innovation, and prevent fair competition or movement of economic resources across national boundaries.

Free trade is analogous to openness to trade, and for comparative and analytical reasons, some economists measure the degree of openness of an economy in terms of its volume of trade (exports and imports) in relation to its national income. Trade may be restricted to protect infant industry, safeguard health, foster employment, ensure desirable product quality, attain fair labor [Page 212]standards, and prevent environmental degradation. Restrictions are normally in the form of tariffs (taxes) or nontariff barriers, including quotas. Some of the reasons outlined above for restricting trade may ostensibly be used by some nations to prevent freer trade and competition.

In contemporary trading relations, disputes arise over the right to protect articles of trade or engage in dis criminatory trade practices. The World Trade Organization (WTO) guarantees the formation of a dispute panel once a trade dispute is initiated for resolution within its juris diction. It then sets time limits for each stage of the resolution process.

The policy to remove perceived restrictions on trade is generally referred to as liberalization. Liberalization is integral to economic integration of nations into the international economy. Some nations are increasingly moving toward integration by creating a free-trade area and optimum currency area, although some express reservations about the intensity and consequences of lib eralization as promoted by some policymakers and inter national institutions such as the International Monetary Fund (IMF).

In a free-trade area, members remove trade barriers among themselves but keep separate barriers against trade with nonmembers. The North American Free Trade Agreement (NAFTA) and the Economic Community of West African States (ECOWAS) are examples of a free-trade area. The European Union (EU) is a much more advanced example of economic integration, which is otherwise known as an “economic union” (common tariff and monetary policy) or “optimum currency area” (single-currency area). For more information, see Bhagwati (2004), Carbaugh (2007), Lowenfeld (2003), and Stiglitz (2003).