Free trade refers to the trade that is done without any restrictions on the movement of good and services between countries, tariff (tax on imported commodities), quota and other quantitative restrictions.Thus in simple meanings, a country can import or export from other one without any barrier.
The effects of free trade on international business can be categorized into gains or positive effects and negative impacts.These all are summarized as follows:
Production maximization and resource utilization
Free trade is highly supported by the economic theory of comparative advantage. According to this, a country would produce the goods in which it has comparative advantage and exports them in turn of imports which are relatively expensive if produced at home.Thus it will maximizes the output of all the participatory countries leading towards high business activities.
As each country increases its production by specialization in the goods for which there are abundant resources in that country which would obviously leads towards full utilization of available resources and also reducing the business costs and increasing business revenues.
High Consumer satisfaction
By means of free trade consumers would be at a higher satisfaction level because they would be able to have a variety of commodities at lower prices thus increasing the standard of living.
Generates high income levels
Under free trade all the factor incomes such as wages, interest rate, profits and rents increases which lead towards increase in GDP thus more availability of investment for business leading to growth in international business.
Extent of market
Free trade enhances extent of markets not only in the home country but also in the other reshaping the entire world into a single market as the demand for products is subject to number of countries.Raises the competition all over the world which make availability of goods at cheaper prices.
Promotes inventions and inovations
As free trade enhances competition among countries it generates a environment for the countries to make new inventions and innovations to survive in the global market.
Free trade increases the factor productivity in each member nation which in turn raises profits, savings , investments leading business towards boom thus economic growth in all trading nations increases.
Increases foreign capital and foreign exchange
In case of LDCs foreign capital is highly needed which is attracted under free trade which generates foreign exchange promoting international business by overcoming the lags.
Free trade promotes business activities among the nations by imports and exports thus creating a lot of jobs among the members also reduces unemployment.
Domestic profits go down
In the domestic industries by reduction of trade restrictions the local industry`s producers have to face low profits as there is availability of goods at cheaper rates.Thus domestic producers withdraw from business with little profits.
A big flaw that is in free trade policy is that the nations do not get equal benefits as the developed countries have more capacity to fulfill the demands while underdeveloped have less thus they get the benefits accordingly.
The same is the case, where underdeveloped countries have comparative advantage in the agriculture field while the developed countries in the technical fields thus get more benefits.
Applicability of rules
Free trade`s rules are not simply applicable to the whole world where the developing countries require special policies that are not part of trade liberalization.
Besides all the flaws trade liberalization reduces trade inequality that was existing in the LDCs and the developed nations but still needs some modifications.
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