What's so good about free trade? Pros, cons and examples.

The rise of trade blocs like the EU and organizations such as the World Trade Organization has promoted widespread free trade. However, recent developments show a shift away from this trend among major economies. Examples include Britain's exit from the EU and America's increasing protectionist policies.

Free trade extends the principles of free market economics to a global scale, promoting efficient resource allocation across countries. By removing barriers like tariffs and quotas, nations can specialize in producing goods where they have comparative advantages. This specialization leads to increased productivity, lower costs for consumers, and overall economic growth.

Comparative advantage explains how countries benefit from free trade by specializing in goods they produce most efficiently. Introduced by David Ricardo in 1817, it highlights that some nations have a natural edge in producing certain products due to factors like climate or resources. For instance, Norway focuses on oil production rather than exotic fruits because its land and labor are better suited for energy industries; meanwhile, New Zealand excels at exporting fruit and food products. By trading specialized goods with each other, both nations allocate resources more effectively while benefiting from economies of scale and increased market competition.

Economic dependence on imported goods, such as food and energy, creates vulnerabilities to external factors like recessions, natural disasters, or wars. Relying heavily on other countries for essential resources leaves nations powerless in controlling supply disruptions. Additionally, specializing in a limited range of products risks economic instability if global demand for those products declines.

Developing countries often struggle to establish new industries due to competition from more developed nations. Free trade can hinder their growth, making it difficult for these infant industries to compete internationally. Implementing protective measures like tariffs on imports or non-tariff barriers such as quotas and regulations allows these economies time to develop a comparative advantage. This strategy helps diversify the economy and ensures long-term competitiveness.

Dumping occurs when countries sell surplus goods on the global market below production cost, destabilizing industries elsewhere. For example, China's alleged steel dumping has caused short-term shocks to foreign steel firms, driving some out of business. Once dumping ceases, prices rise again unpredictably. To mitigate such risks and protect domestic markets from external vulnerabilities, measures like tariffs or trade regulations may be necessary.

Free trade can trigger a 'race to the bottom,' where countries reduce regulations, standards, and labor protections. This is done to gain comparative advantages over nations with stricter rules. Such practices undermine fair competition and may lead to negative consequences for workers' rights and environmental safeguards.

Free trade, while beneficial in fostering international cooperation and economic growth, often raises concerns about trading with countries that have lower standards. This creates a dilemma between embracing open markets or resorting to protectionist policies to safeguard domestic industries. The middle ground lies in balancing these approaches by promoting fair competition without compromising ethical labor practices or environmental regulations.

The European Union exemplifies a model of nearly frictionless trade among its member states, encompassing goods, services, and free movement of people. Shared regulations prevent issues like the race to the bottom on standards while institutions such as the European Central Bank ensure coordinated monetary policies. However, this openness contrasts with protectionist measures in agriculture through tariffs and subsidies that disadvantage global competitors. Non-tariff barriers also restrict imports like U.S.-produced chlorinated chicken due to stringent EU standards.

Free trade offers significant benefits, such as increased consumer choice and lower prices. However, it necessitates interdependence among nations, which many countries resist to maintain their independence. Protecting industries from external shocks remains a priority for governments despite the potential prosperity free trade can bring.