Free trade is the importing and exporting of goods and services between or among nations with a total absence of government policies that restrict such trading. It is the opposite of protectionism, which is a highly-restrictive trade policy intended to restrict or eliminate trading with other countries and which is commonly used to protect domestic industries. Most industrialized nations today have hybrid free trade agreements, which allow for some extent of trade restrictions. Trade barrier categories include import duties, import quotas, subsidies for manufacturers, and various types of regulations.
Economists have long asserted that free trade is a good thing for several reasons. One is the theory of comparative advantage, which states that there is a net benefit to any two countries from specialization and trade when one country can produce a good or service at a lower opportunity cost than the other. A second is that, at least in some situations, free trade can lead to increased competition, thereby tending to reduce prices and improve quality. A third is that the increased specialization resulting from unobstructed trade can result in greater economies of scale, thereby reducing production costs. A fourth is that free trade may provide a greater choice of goods and services for consumers and manufacturers in each country.
The apparent great benefits of free trade, together with intense lobbying by powerful business interests expecting to profit from it, has been a major factor in the lifting of trade barriers and the consequent proliferation of international trade and international specialization in recent decades, with supply chains for many types of products now often stretching around the world. Another major factor in this proliferation has been the great reduction in the costs of, and increase in the speed of, international transportation and communications, including the development of containerization and massive container ships, inexpensive air cargo, and high-speed internet connections. This surging international trade has clearly coincided with great increases in wealth among many or most nations that have reduced their trade barriers.
While all of these arguments regarding the benefits of free trade are, in themselves, at least partially, correct and have often been highly persuasive, there are additional important considerations regarding international trade policy that are often ignored or trivialized. This is largely because they have been less obvious, difficult to quantify, and their advocates have had relatively weak political power.
One is the substantial negative externalities from long distance shipping: that is, water pollution and air pollution from the fossil fuels used for such shipping, and the consequent contribution to climate change and species loss.
A second is loss of diversity of skills in some countries due to extreme specialization that can occur when trade barriers are reduced or removed. This reduces the flexibility of such countries to adjust to emergencies and changing circumstances, both international and domestic, because once some skills are lost it can extremely difficult and time-consuming to re-acquire them.
A third is the disruption to existing industries, and to the people and communities that depend on them, that often occurs. Closely related to this is the fact that the benefits of reducing trade barriers are typically not evenly distributed within a country and they often accrue mainly to just small segments of a population, usually the most economically and politically powerful, while others are harmed.
Although international trade can often increase competition, at least initially, the extreme specialization by country that sometimes occurs can also eventually reduce competition, thus resulting in some countries acting like monopolies. Monopolistic behavior typically includes increasing prices, reducing quality, and having less incentive to devote resources to innovation as compared with what would exist in a more competitive environment.
There can also be political and national security risks for a country to be largely or entirely dependent on other countries for certain products, materials or services. For example, telecommunications equipment monopolized by one country, especially an adversarial one, can result in concern about the privacy and security of communications in countries that use such equipment. Or a country that monopolizes critical materials or pharmaceuticals could use its position to help gain undue political and economic power in other countries.
These important disadvantages of unfettered free trade suggest that consideration should be given by individual countries, or groups of countries, to reimposing some trade barriers where there would be a net benefit and an equitable distribution of such benefits. Any reimposition should be based on the use of a comprehensive cost-benefit methodology (CCBM), rather than conventional cost-benefit analysis in the piecemeal way in which it is sometimes employed, to determine the optimal mix and levels of such barriers.
Still another consideration is that advances in technology are making the localization of some production and services easier and more desirable than in the past. Specifically, advances in mechatronics, which combines mechanical engineering and electronics, together with those in computer software and artificial intelligence, are making possible the increased automation of production of many products, thus reducing the cost advantage of producing in low labor cost countries and the cost disadvantage of producing in smaller quantities.
Both of these factors can make it increasingly economical to produce some products locally, thereby weakening the usually-mentioned reasons for promoting free trade (i.e., allowing production to be concentrated in developing countries to reduce labor costs and in few countries to obtain economies of scale) and thus providing the potential to reduce some of the environmental and other harm that often arises from unfettered free trade.