Examining Free Trade And Free Trade Theories Economics Essay

Adam Smith, the male parent of modern economic sciences, became the universe ‘s first economic expert to propound the construct of free trade. Other high economic experts joined ranks with Smith and they were John Maynard Keynes and David Ricardo.

In 1947, the formation of General Agreement on Tariffs and Trade ( GATT ) marked a important measure to hike planetary trade but its function was taken over by the World Trade Organization ( WTO ) in 1995.

WORLD Trade ORGANISATION ( WTO ) is an international organisation which was formed to administrate and ease up international trade. The WTO is the lone organisation in the universe which deals with the regulations and ordinances of international trade among states. The chief end of the universe trade organisation is to help the manufacturers of goods and services, importers and exporters to transport out their concern expeditiously. The WTO is located in Geneva, Switzerland.


To organize a cooperation with other international organisations in the universe.

To ease up several barriers of international trade confronting many states.

The WTO is aimed at settling differences among states in the whole facet of international trade.

The WTO is besides aimed at supervising the national and international policies that guide states carry oning any signifier of trade that is national and international.

The WTO is aimed at liberalisation of trade.

The WTO is aimed at reexamining and supervising the trade understandings set to steer several states in the facet of trade.

The WTO has a map of cut downing or extinguishing barriers of trade that may do a job to some states for cases high duties and other affairs such as dumping.

To set up a free trade foremost, foreign company should cognize what is broad and has the advantage of how, what should be done so they can enlarge other states and how of import the stuff to follow in order to win in this concern. As Marketing Consultant I would rede on this free trade on how to spread out their industry globally and the company must hold constituents and inside informations for spread outing its concern and besides be willing to cognize the advantages and disadvantages so that he could be doing the right determination.

Free trade is an economic construct mentioning to the merchandising of merchandises between states without duties or other trade barriers. Free trade is the absence of unreal ( government-imposed ) barriers to merchandise among persons and houses in different states. International trade is frequently constricted by different national revenue enhancements, other fees imposed on exported and imported goods, every bit good as non-tariff ordinances on imported goods ; theoretically, free trade is against all these limitations. In world, trade understandings that are labeled as “ free trade ” by their advocates may really make their ain barriers to a free market. Some critics of such trade understandings see them as protecting the involvements of corporations.

Free trade offers many Opportunities such as:

Increased production and efficiency

This is when some of the states that specialize in making trade goods where they have the comparative advantage will increase their production, alternatively of concentrating on merchandises or industries in which other states have the comparative advantage.

By increasing production, states increase their efficiency. By specialising, states better allocate their resources and purchase cheaper resources from other states.

Customer ‘s satisfaction

Though free trade leads to a planetary market, consumers benefit from the competition and assortment brought to the market. Cheaper goods and stuffs can be bought easy from foreign providers

Besides another benefit to consumers is increased inventions. As free trade expands, competition besides expands. To remain competitory, houses must seek ways to make the comparative advantage. This leads to increased invention that improves merchandises.

Employment and Economic Growth

In malice of the fact that free trade may do occupations in one peculiar industry to do up overseas, occupations in the exportation and importing sides will increase. When productiveness increases in importing and exporting, rewards is likely to lift.

If the state has lowered its trade limitations, the gross domestic merchandise will lift. Since consumers can buy quality merchandises for cheaper, they have more expendable income.

Foreign exchange additions and decreased poorness

If the state purchases a merchandise from another state with money, it is highly of import to direct the exporting state non-interest IOUs in exchange for existent goods. The exporting state, though, must utilize the money within the state that imported the merchandises. For case, the United States purchases steel from China with U.S. money at the current market value. China will subsequently utilize the U.S. money to buy computing machine plans from the United States at the hereafter market value.

Besides, states that open their trade barriers to let free trade have the opportunity to come in the planetary market, which will increase income for the state. Thus is to state trade barriers increase the cost of trading so consumers will hold more disposable income with free trade.

Increased export

States with jurisprudence trade limitations normally cause ill will with other states. Therefore, the state with the limitations besides limits its ain ability to export. When a state removes their trade limitations, other states are more willing to accept the exports.

Minimizes War

When states work together professionally, common regard for the states ‘ imposts and civilizations addition. Fears and biass diminish and states are less likely to contend to each other.

Free trade Challenges:

Might increase the figure of harmful goods imported

Loss of occupations in states

Leads to ‘dumping ‘ which is when foreign houses sell their goods in another state for below their costs of production ; a signifier of marauding pricing to drive out local rivals

It prevents infant industries in a state from developing as it wo n’t hold economic systems of graduated table like larger houses abroad doing it harder for them to vie on monetary value

Free trade could take to over-specialization in the long tally so states will endure from depending excessively much on a few peculiar goods as they risk a immense autumn in income if there is a alteration in demand.

International Trade is the exchange of goods and services between one state and another. The exchange of goods and services across international boundaries has enabled the rule of division of labor to be extended to the international domain.

International trade arises because:

The production of different sorts of goods requires different sorts of resources used in different proportions

The assorted types of economic resources are unevenly distributed worldwide

The international mobility of resources is highly limited

Becoming involved in international trade can assist your concern:

To increase in the criterion of life of all people in the states themselves. It enables consumers in all states to hold a larger measure of goods and services than they would hold had if they to be self – sufficient and specialisation itself addition end product.

Some states will be able to sell their resources for foreign exchange which is used to import machinery and other factors inputs necessary for industrialisation. Exports likely generate valuable foreign exchange for economic development.

It encourages efficiency since all manufacturers involved in international trade will seek to be more efficient in order to be competitory both in domestic and foreign market.

International trade will advance peace and security, because states are reciprocally independent and so they will seek to avoid outbreak war.

International trade besides will enlarge the trade good market for a state ‘s trade goods of graduated table due to the advantage of a big market. Economies of graduated table will lend to fuller use of capacity and new industries may be set up which were non possible earlier due to a limited domestic market.

International trade broadens the consumer ‘s pick, supplying them with entree to a wider scope of trade goods from abroad. This greater assortment increases the public-service corporation of consumers.

Problems faced by developing states in International trade

Most developing states produce primary merchandises that are capable to worsening footings of trade. The footings of trade refers to the rate at which the trade goods of one state exchange for those of another. The grounds for worsening footings of trade include income inelastic demand and the weak bargaining place of primary manufacturers, for case agricultural manufacturers.

Many developing states are faced by protectionist policies of developed states and the merchandise of developing states can non travel through the markets of developed states.

Developing states are plagued by balance of payment jobs particularly current history shortage. Since export net incomes are deficient to finance import outgo, this goes to developing states holding terrible external debt jobs.

Many developing states are export dependant and import dependant. This makes them peculiarly vulnerable to alterations in the international economic conditions.

The production of primary merchandises by developing states leads to fluctuate widely in international markets basically because of monetary value inelastic demand and supply.

In order to take part in planetary trade, your concern will necessitate to convey extra costs, such as, going to foreign locations, developing new promotional stuff, modifying your merchandise to run into the demands of a new market, and transporting overseas. For these grounds, the determination to prosecute on international trade should be done with eyes unfastened.

Procedures of making Global Business

There are several processs you can utilize to come in a foreign market, including exportation, importation, licensing, joint ventures and off-shore production. For an bing concern that creates a touchable merchandise, exporting is the most common method. Start-up costs and hazards are limited, and net incomes can be realized early on. And if you are get downing a new venture, the other picks are options that may cut down some of the start-up hazards.

There are two basic ways to export: straight or indirectly.

Direct Exporting

In direct exportation, your company finds a foreign purchaser and so makes all agreements for transporting your merchandises overseas. This method requires a batch of footwork and substructure, and entails more hazard, but the possible net income wagess are frequently higher. If you choose to export straight, you have several options:

Gross saless Representatives/Agents — Basically, you employ foreign-based representatives or “ agents ” who work on a committee footing to turn up purchasers for your merchandise, merely as you would domestically.

Distributors — You strike a trade with a foreign distributer, who purchases ware from you and resells it with a markup. The distributer maintains stock list and provides after-sales service to the purchaser.

Indirect Exporting

Your company uses an export intermediary to execute most of the inside informations of the export agreement. Many little concerns choose this option, at least at the beginning. There are several types of export mediators:

Commissioned agents – These are agents who link your merchandise or service with specific foreign purchasers, leting the primary company to carry through the order and manage wadding, transportation and export certification.

Export Management Companies ( EMCs ) and Export Trading Companies ( ETCs ) — These companies operate in the state where the goods are to be exported. EMCs by and large represent your merchandise to advance it to other prospective abroad buyers, while ETCs normally work harmonizing to demand, happening a demand and sourcing your merchandise for foreign purchasers. Both types of companies normally take attention of all facets of the export dealing ( including carry oning market research, advancing your merchandise overseas, accessing proper distribution channels, and turn uping foreign distributers ) , doing them a possible option for smaller companies that lack the clip and expertness to interrupt into international markets on their ain. EMCs and ETCs normally operate on a committee footing, although some work on a beforehand footing and some take rubric to the goods they sell, doing a net income on the markup.


Industrialization refers to the procedure of transforming natural stuffs, with the aid of factors of production into consumer goods or new capital goods which permits more production. Here is an illustration of Wheat industry ( agriculture industry ) to to the full work the free trade chances when looking to spread out into foreign market for the first clip.

Wheat is a grass that is cultivated worldwide. The planetary grain trade has ever been of involvement to investors because wheat represents one of the individual most of import constituents of universe nutrient ingestion. Wheat is one of the universes cardinal staple merchandises, with about 10 per centum of production traded on universe markets each twelvemonth.

The United States is one of the universe ‘s largest wheat bring forthing states. Japan is one of the largest importers of wheat in the universe, with imports arising from Australia, Canada, and the United States. Exportable wheat supplies are besides available from Argentina, Europe, Ukraine and other countries of the universe, depending on harvest state of affairss. This makes wheat a genuinely planetary market and allows bargainers to come in into a planetary environment to make a wide trading scheme utilizing wheat entirely or in combination with other grains.


The theory of Comparative advantages:

Fully employ all resources universe broad

Allocate those resources within states to each state ‘s comparative industries

Allows the states to merchandise free thereafter

The construct of comparative advantage on Wheat industry ( Agricultural ) and Wine Industry ( Beverage )

The rule of comparative cost provinces that even where one state has an absolute advantage over the other in both industries, specialisation and trade can still profit both states provided each state has a comparative cost advantage.

Let state, two states England and Portugal bring forthing two goods, which is Wheat and Wine utilizing labour as the level input in production. Assume that the productiveness of labour prevarications between industries and across states, and presume that Portugal has more productive in both goods.



Wheat ( cost per unit in adult male hours )

Wine ( cost per unit adult male hours )







Portugal is proportionately better bring forthing Wine than Wheat. Therefore, Portugal is said to hold a comparative advantage in the production of vino. England is comparatively better at bring forthing Wheat than Wine ; likely England is said to hold a comparative advantage in the production of Wheat.

Trade might be advantageous:

Cost of production as shown in table 1 ; England is assumed to hold 270 adult male hours available for production. Before trade takes topographic point it produces and consumes 8 units of Wheat and 5 units of Wine. Portugal has small labour resources with 180 adult male hours of labour available for production before trade takes topographic point it produces and consumes 9 units of Wheat and 6 units of Wine. Entire production between the two economic systems is 17 units of Wheat and 11 units of Wine.

Table 2:


Before trade

After trade










Portuguese republic










If both states now specialize, Portugal bring forthing merely Wine and England bring forthing merely Wheat where entire production is 18 units of Wheat and 12 units of Wine. Specialization has enabled the universe economic system to increase production by 1 unit of Wheat and 1 unit of Wine.

The cardinal generalisation of the theory of additions from trade can now be stated as: Whenever chance costs differ among states, specialisation of each state by bring forthing those trade goods in which it has comparative advantages will do it possible to increase production of all trade goods relative to the measures available to them if each state attempted to be self-sufficing. And as for the rule of comparative advantage recommends that a state should specialise in the production of merely those trade goods in which it has a comparative advantages and export excesss of such trade goods worldwide.

The Concept of absolute advantage

A state is likely to hold an absolute advantage in the production of a peculiar trade good if with a given measure of resources it can bring forth more of that trade good than can any other state utilizing the same measure of the same resources. Let presume for case that it takes 100 adult male hours to bring forth 1 ton of Wheat flour in England and 300 adult male hours to bring forth 1 ton of Wheat flour in Portugal. This means that 100 adult male hours of Portugal will bring forth merely one 3rd ton of Wheat flour. Since a given measure of labour ( 100 adult male hours ) produces more Wheat flour in England than in Portugal. England is said to hold an absolute advantage over Portugal in the country of Wheat Production.

Therefore, if state A has an absolute advantage over another state B in 1 trade good while B has an absolute advantage over A in another trade good, the entire production of both can be increased by each state specialising in the production of the trade good in which it has an absolute advantages, it is of import to cognize that trade is necessary to accomplish additions from specialisation.

Restrictions of the theory of Comparative Advantage

The theory of comparative advantage takes topographic points under conditions of changeless costs or changeless returns of graduated table. The theory lies on the unrealistic premise that chance cost ratios remain unchanged as resources are moved from one industry to another. In other words, as specialisation increases we are likely to meet the jurisprudence of decreasing returns whereby the additions from specialisation will be reduced if the industry is sing increasing costs ( decreasing returns ) . Although, increasing specialisation will give the benefit of economic systems of graduated table and under conditions of diminishing costs, benefits will be considered.

Conveyance costs may outweigh any comparative advantage

Governments may curtail trade

The theory assumes the being of two states and two trade goods in the universe. This premise is unrealistic and hence, the theory is non a really good account of international trade

The additions from trade are modifies by being of conveyance costs and duties. The economic effects of these are really similar since in both instances the cost of traveling goods is increased

Protectionism – barriers to international trade

Import controls are barriers to the free motion of goods and service that seek to falsify the form of trade between states.

A assortment of import controls can be introduced.


A duty is a revenue enhancement on imports and is used to curtail imports and raise gross for the authorities. We assume in the diagram below that manufacturers from other states can provide the good at a changeless monetary value of Wp – their supply curve is absolutely elastic.

The domestic demand and domestic supply curves are shown. If the market monetary value is Wp, end product Qs is produced by domestic houses and Qd will be the demand from place consumers. Because Qd & gt ; Qs, imports will come into the economic system to fulfill the extra demand.

A duty is placed on the value of imports. This raises the monetary value of imports and as a consequence, domestic demand contracts and domestic supply expands. Home manufacturers can provide more at the new higher monetary value. The duty gives domestic houses a competitory encouragement. The volume of imports has reduced.

The consequence of the duty depends on the monetary value snap of demand and the monetary value snap of supply. A duty will hold a greater consequence the more elastic the demand and supply. If the demand is inelastic so the infliction of a duty will hold small consequence on the degree of imports. The debut of duties by one state can take to retaliation responses from other states. This revenge can take to damaging trade-wars.

Import Quotas

An import quota straight reduces the measure of a merchandise that is imported and indirectly reduces the sum of money that the export manufacturers receive. The chief donees of quotas are the domestic manufacturers who face less competition.

Export Subsidy

An export subsidy is a payment to a domestic manufacturer who exports a good abroad. If having an export subsidy, a house can stay competitory abroad by exporting up to the foreign monetary value ( because the subsidy will cover some of the difference ) yet receive the higher monetary value domestically. The effects of a subsidy are the antonym of those of a duty.

Voluntary Export Restraint

A voluntary export restraint is similar to an import quota. With a VER, the exporting state voluntarily restricts the figure of goods that it ships to its trading spouse. Foreign exporters must buy licenses from its authorities and so exports its allotted sum. The monetary value they receive for their goods, minus the cost of the export license, is their net incomes

The Heckscher – Ohlin theory:

The theoretical account was developed by Swedish economic expert, which states that states export the merchandises that use their abundant factors intensively and import the merchandises utilizing their scarce factors intensively. A state is considered as labour abundant if it has a higher ratio of labor to other factors than does the remainder of the universe. On another side, a merchandise is labour – intensive if labour costs are a greater portion of its value than they are of the value of other merchandises.

Well, in the trade forms of some industrialised states we merely happen a just verification of the H – O anticipation. Example ; Japan is crucially dependent on imports of natural resources intensive primary merchandises ( agribusiness, fishing, forestry, and minerals ) . However, it has a peculiar export advantage in engineering intensive merchandises as H-O would foretell.

Market Factors to Measure

1. Demographic and Geographic Factors

Check on a sufficient population size, growing and denseness in the right demographic part

Check on clime compatible with your merchandise

Check on transporting distance economically executable

Check if there is a sufficient physical distribution and communicating web

Check if the natural resources you may necessitate are available

2. Political Factors

Check if the authorities conformable to merchandise with that state

Check if the state politically stable

Check if the authorities have heavy engagement in concern

Check If there are bing trade limitations, duties, non-tariff barriers or bilateral trade understandings

3. Economic Factors

Check if the economic system sufficiently developed to back up your merchandise

Check if foreign trade a important portion of the economic system

Is the state ‘s currency stable? What is the rising prices rate, handiness, controls and stableness of exchange rate.

4. Social/Cultural Factors

What is the literacy rate and mean educational degree in the state?

Is there a in-between category that would back up your merchandise?

How is the market similar to and different from your domestic market?

Make the people have sufficient disposable income and a leaning to pass money on merchandises similar to yours?

Are there linguistic communication and cultural barriers to making concern?

5. Market Access Factors

Are there restrictions on trade, such as high duty degrees or quotas?

Are at that place local criterions, patterns and other non-tariff barriers?

What certification will you necessitate?

What is the state ‘s policy on honouring patents and hallmark protection?

6. Distribution and Production Factors

What are local fabricating conditions?

What are local labour Torahs?

Is there labour available with the accomplishments you may necessitate?

Are there sufficient regional and local transit and storage installations?

Are there mediators available if you need them?

Forming Connections in Your Market

Once you ‘ve identified the merchandise or service you want to import or export and the state that involvements you, you need to do concern connexions in the chosen market. You need to find whether you will manage your planetary concern straight or take an agent, distributer or intermediary to move on your behalf, and if so, you need to happen person qualified to make so.

Export Mailing Lists – These are custom hunts of the databases of prospective superintendents ‘ clients. You select market standards, so have a list of relevant makers, agents, retail merchants, service houses, authorities bureaus with names, references, contacts, merchandises and other information. Output is available as get offing labels or on disc.

Trade Opportunities Programs – This service collects gross revenues leads from abroad houses looking for U.S. merchandises. Lead inside informations include specifications, measures, bringing day of the months and command deadlines.

Agent/Distributor Service – This is a duplicate service that performs a custom hunt of foreign import agents and distributers, contacts them with your company ‘s literature and merchandises, so prepares a study placing six chances that are interested in making concern with you.

Once you ‘ve identified possible beginnings, reach them to seek specific merchandise information, such as specifications, merchandise samples and monetary values. Reach them by missive, facsimile, electronic mail, teletypewriter or overseas telegram. At this point, it ‘s best to interpret your concern ‘s ain literature into the linguistic communication of the state where you plan to make concern. Although contacts at most foreign companies that do international concern will talk English, it ‘s best to pass on in your possible beginning ‘s linguistic communication.

Pricing Your Merchandise

Pricing a merchandise is ever one of the most of import parts both of marketing a merchandise and doing a concern profitable, and, unsurprisingly, pricing a merchandise for the abroad market is one of the most critical factors for come ining foreign markets. Monetary values must be high plenty to bring forth a sensible net income, yet low plenty to be competitory in abroad markets.


I would wish to urge that as an Industry you should be cognizant of the effects of free trade and besides the enlargement of traveling into foreign market as it is non that simple because there are so many things to follow up before acquiring into foreign market. I have tried to lucubrate some of the of import things on free trade and on foreign investing which might assist in one manner or another for the industry to win acquiring into foreign market. Apart from the above accounts I would wish to add some of the cardinal points that would besides be of aid for the industry that has to travel planetary for the first clip. These are some of the extra points for international concern. The industry should supply:

International Business Plan

If you ‘re already in concern, you likely already hold a concern program. All you have to make is to alter it to include the particulars of international concern. If non, you ‘ll necessitate to get down from abrasion in order to specify your company ‘s present position, internal ends and committedness, and to seek fiscal aid if you expect to prosecute a bank loan or other types of investing. An international concern program should specify:

How you plan to come in the foreign market

Why you are interested in planetary trade

How you plan to transport the goods

How you plan to finance your planetary enlargement

What revenues your venture is expected to convey in

Whether you plan to prosecute abroad partnership or investings

What the legal demands are to come in the markets that involvement you

Who your possible export markets ( or import beginnings ) and clients are

What extra costs ( travel, transportation, selling, sourcing ) you expect to incur

Geting Ready to Travel Global

For your concern to win globally, the rules are the same as wining domestically: You need to happen a merchandise that will make full a targeted demand for the buyer in export markets harmonizing to monetary value, value to customer/country and market demand. Do you hold a merchandise for which there is a market overseas? Is at that place a merchandise manufactured abroad that has a market domestically? If so, you need to place why your merchandise will hold a market overseas or why an imported merchandise will sell domestically. What gives your merchandise a competitory advantage for an abroad market? Who are the purchasers for your merchandise? Why would they purchase from you? Take the undermentioned stairss to find the feasibleness of your international concern program.

Analyzing Your Industry

You need to place where your industry is today and predict the tendencies and waies that it will take over the following three to five old ages. How competitory is your industry in the planetary market? To happen out, confer with the undermentioned resources:

Talk to people in the same concern or industry, research industry-specific magazines, attend trade carnivals and seminars.

Consult the National Trade Data Bank ( NTDB ) , obtain import/export statistics from the Bureau of the Census, and reach the Small Business Administration ( SBA ) or the Department of Commerce ( DOC ) territory office in your country.

Reach the SBA or the Foreign Commercial Service ( FCS ) territory office and reach a DOC of that state or industry desk.

Contact SBA, your province international trade office, a DOC state or industry desk in for federal or province authorities market surveies that have been conducted on your industry ‘s possible international markets.

Find export informations on your industry through your SBA or territory office near you

Analyzing Your Business ‘s Capabilities

If you have an bing concern that you are be aftering to spread out globally, you likely are already making a few things right to hold reached this point in your concern. However, you ‘ll necessitate to measure your concern ‘s strengths and failings to find what attack to take in the international market. The undermentioned inquiries should be asked:

Why is your concern successful in the domestic market? What ‘s your growing rate? What are your strengths?

What merchandises do you experience have export possible?

What are the competitory advantages of your merchandises or concern over other domestic and international concerns?

What are the demands that will be filled by your merchandise in a foreign market?

What competitory merchandises are sold abroad and to whom?

Is there an after-market for your merchandise? Who will supply it?

What complementary goods and engineerings does your merchandise necessitate?

If your merchandise is an industrial good:

What houses are likely to utilize it?

What is the utile life of your merchandise?

Is usage or life affected by clime?

Will geography affect merchandise purchase ( e.g. , transit jobs ) ?

Will the merchandise be restricted abroad ( e.g. , duties, quotas or non-tariff barriers ) ?

Geting Paid

One of your primary concerns in come ining the abroad market is to be paid in full and on clip. While the recognition of a purchaser is ever a concern, you may hold less resort when it comes to roll uping unpaid international debts, so you should exert excess cautiousness. Be certain that you and your purchaser agree upon the footings of the sale in progress.

Choosing the Best Markets to Enter

For case, In US there are three largest markets which are Canada, Japan and Mexico, these states may non be the largest markets for your merchandise. If you ‘re non certain where to make concern, one good index is to happen out where your domestic rivals have expanded internationally. Once you ‘ve identified several states that you think have market potency for your merchandise, you are ready to make serious market research. Research and reexamine informations and information for the undermentioned factors for each state.


Free trade produces victors and also-rans non all states benefit at the same clip from trade peculiarly those with hapless fight. If a state believes that it is non profiting reasonably from take parting in free international trade, it is more likely to desire to present some signifier of import control or protectionist step.

Besides, acquiring involved in international selling has several possible advantages. The export market may supply enlargement chances that are merely non available in the domestic market. Exporting selling can hold a diversifying impact on grosss without adding merchandise lines significantly different from what you presently produce.

The international market offers a alone challenges and bettering your international selling accomplishments can hold a positive impact on your full operation.

Last, with the alterations that are presently taking topographic point sing free trade, viing on the international market may be a fact of life for all concerns. The best defence may be to develop active planetary discourtesy.


Daniels, Radebaugh, Sullivan, International Business ( 12th Edn ) Peason Education

Griffin, R.W. & A ; Pustay, M.W. ( 2007 ) International Business ( 5th edn ) Pearson Education