Adam Smith, author of The Wealth of Nations, shows support for free trade and emphasises it as a trade policy which ought to be adopted. Krugman and Obstfeld back Smith's support by stating that the efficiency of trade is increased by free trade and accumulates the national income of countries. Free trade is a theory which suggests that each nation benefits in specialising in an economic activity from which it gains absolute advantage, enjoying absolute superiority over other nations in a specif economical activity (Peng). With free trade follows opportunity, replacing regulation and growth of economic activity. (Rugmann and Collinson).
Arguments for free trade
If nations adopted a free trading policy the total cost of tariffs, duty on imports, would be reduced; resulting in a cost efficient method of international trade. Alongside specialising in an economic activity within one nation, a reallocation of resources for more efficient nations allows trade to be fair and enhance the quality of resources.
The reduction of trade barriers enables the local prices of goods to reduce too, which will eventually lead to an enhancement in the economical welfare situation of nations by reducing the limitations of new entrants into the markets. The removal of barriers would mean a free and fair opportunity for all nations to gain impartial access into any market benefitting them with a fair chance in competition. Another beneficial outcome is that with new economic activities taking place in foreign subsidised countries will see an increase in employment for local potential workers, lower business costs and a circulation of the local finances enhancing the economy of the nation. However, a noteworthy point to mention is that the free flow of FDI does not necessarily mean that all social groups will see benefits.
McDonald and Burton clarify that infant industries can feel supported into growth (and sometimes beyond) by the trade policy of protectionism and tariff barriers. This form of strategic protectionism enables industries seeking to grow to enjoy the benefits of first mover advantages, a concept of specialising in producing and exporting only those goods and services which it can produce more efficiently (Investopedia) and the benefits of economies of scales. A prime example of this is Amazon, the first online bookstore. By gaining the first mover advantage into the markets, it has gained and maintained dominance over many firms. Firms have adopted the concepts and practices such as retailers like Barnes and Nobles. Professer Marvin Lieberman and David Montgomery, Stanford University, conclude that first mover advantage can be gained from technology leadership, control of resources and buyer switching costs after gaining the opportunity to access the pioneering stage of a concept.
Free Trading Areas
Free trade areas, FTA, are economic integration arrangements in which barriers to trade (e.g....