Free trade facts for kids
Free trade is a way for countries to buy and sell goods and services to each other without many rules or taxes. Imagine two friends trading toys. If they can trade freely, they don't have to pay extra money or follow complicated rules just to swap toys.
In the world, free trade means there are no special taxes (called tariffs) on things coming into a country (imports) or going out (exports). It also means fewer rules that might make trading harder.
Many countries today are part of the World Trade Organization (WTO). This group helps countries agree on rules for trade. Countries can also make their own deals, like free trade agreements, with just one or a few other countries. For example, the European Economic Area is a big free trade zone where many European countries trade freely with each other.
However, most governments still use some rules or taxes to protect their own businesses and jobs. This is called protectionism. They might add taxes to imports or give money (subsidies) to local businesses.
Historically, trading freely became very popular from the 1800s until World War I. It grew again in the 1920s but slowed down during the Great Depression. Since the 1950s, free trade has grown a lot, and today, countries trade more openly than ever before.
Most experts who study economics generally agree that free trade is good for countries. They believe it helps economies grow and makes everyone better off. However, when a country opens up to free trade, some local businesses and workers might struggle at first because they have to compete with cheaper goods from other countries.
Contents
What is Free Trade?
Free trade means countries can trade without many barriers. Here are some key parts:
- Trading goods without extra taxes like tariffs.
- Trading services (like banking or tourism) without special taxes or rules.
- No special rules that give some companies an unfair advantage.
- Easy access for businesses to buy and sell in different countries.
- Companies cannot unfairly control markets, like having a monopoly (being the only seller).
- Countries make agreements to encourage more free trade.
How Free Trade Helps Economies
Economists use ideas like "comparative advantage" to explain why free trade is good. Imagine one country is really good at making cars, and another is really good at making clothes. If they trade freely, each country can focus on what it does best. Then, they can trade their extra cars for clothes, and both countries end up with more of what they need.
What are Tariffs?
A tariff is like an extra tax on goods that come into a country. When a country puts a tariff on something, like imported shoes, those shoes become more expensive for people to buy. This makes local shoes seem cheaper, so people might buy them instead.
But tariffs can have downsides. When prices go up because of tariffs, people buy less. This can hurt the overall economy because there's less trade happening. Experts say that removing tariffs and having free trade usually makes society better off, even if some local businesses face more competition.
Technology and Growth
Free trade can also help countries get new technologies and ideas faster. When countries trade, they share knowledge and ways of doing things. This can lead to new inventions and better ways to produce goods, which helps the economy grow.
Better for Everyone?
Studies show that when countries trade more freely, it can lead to more goods being produced, more food available, and a better life for people around the world. This is especially true for developing countries.
Sometimes, if a country only has free trade deals with some countries and not others, it can lead to problems. It's best if goods are made by the country that can produce them at the lowest cost. But if there's a tariff on the cheapest producer, and a free trade deal with a more expensive producer, it can make trade less efficient. That's why many economists want to lower tariffs for all countries.
What People Think About Free Trade
Most economists agree that free trade helps economies grow and makes people's lives better. They believe it offers more choices for shoppers and makes businesses more efficient.
For example, economist Paul Krugman said that free trade is very helpful for the whole world, especially for people in poorer countries. It allows them to improve their living standards. However, he also noted that increased trade with countries where workers are paid less might put pressure on wages for some workers in richer countries.
People around the world generally support trading with other countries. But they are not always sure if trade creates jobs, increases wages, or lowers prices. In richer countries, about a third of people think trade increases wages, while in developing countries, almost half think so. Many people in both rich and developing countries believe trade increases prices. People with more education tend to think trade lowers prices.
A Look at Free Trade History
The idea of free trade started to become popular in the 1700s with thinkers like Adam Smith and David Ricardo. They believed that countries would become richer by trading freely.
For a long time, many countries used a system called mercantilism. This meant a country tried to export more than it imported to gather wealth. But Smith and Ricardo argued that it was better for countries to focus on making what they were best at and then trade for other things.
In the 1800s, Britain became a big supporter of free trade. They removed laws that taxed imported grain, which helped lower food prices. The first major free trade agreement was between Britain and France in 1860.
The United States, however, used protectionism for a long time, putting high taxes on imports to protect its own industries. Leaders like Abraham Lincoln supported these high tariffs. It wasn't until after World War II that the U.S. became a strong supporter of free trade, helping to create groups like the World Trade Organization.
In Europe, six countries formed the European Coal and Steel Community in 1951, which later became the European Union. A main goal was to create a "single market" where members could trade freely. Today, the European Union has free trade agreements with many countries.
Free Trade Today
Most countries are part of the World Trade Organization (WTO), which helps reduce trade barriers. Many countries are also part of regional free trade areas, like the European Union or the North American Free Trade Agreement (NAFTA), which was replaced by the United States-Mexico-Canada Agreement (USMCA).
Even with free trade agreements, most countries still use some protectionist policies. Experts say that trade policy is like riding a bicycle: you have to keep pedaling towards more openness, or you risk falling back into protectionism. To keep moving forward, leaders need to show how free trade benefits everyone, not just a few groups. They also need to help people who might lose their jobs because of increased trade.
Historically, many countries that are now rich, like the United States and Britain, used protectionism for a long time before becoming more open to free trade.
Free Trade in Goods
The Global Enabling Trade Report looks at how easy it is for countries to trade goods. It considers things like market access, customs rules, transportation, and business environment. Here are some of the top countries that make it easy to trade goods:
Netherlands
Hong Kong
Luxembourg
Sweden
Finland
Austria
United Kingdom
Germany
Belgium
Switzerland
Denmark
France
Estonia
Spain
Japan
Norway
New Zealand
Iceland
Ireland
Chile
United States
United Arab Emirates
Canada
Czech Republic
Australia
South Korea
Portugal
Lithuania
Israel
Arguments About Free Trade
People, governments, and different groups often debate whether free trade is good or bad.
Some arguments against free trade include:
- It might hurt new, small businesses in a country.
- It could lead to job losses in some industries.
- It might cause unfair wages or poor working conditions in some places.
- It could harm the environment if countries don't have strong rules.
- It might make poorer countries even poorer.
Local businesses often don't like free trade because cheaper imported goods can reduce their sales and profits. For example, if a country removes taxes on imported sugar, local sugar producers might earn less. While shoppers would pay less for sugar, the local producers might lose a lot, so they often argue against free trade.
Some groups, like those against globalization, believe that free trade agreements don't always help poor or working-class people and can sometimes make them worse off. For example, some argued that allowing cheap, subsidized corn from the United States into Mexico under NAFTA hurt Mexican farmers.
Studies show that people with less education are more likely to support trade restrictions. This might be because they are less exposed to information about how trade affects the economy as a whole.
Free Trade and Colonialism
Some people argue that free trade can be a new form of colonialism or imperialism. They believe that powerful countries use free trade to benefit themselves, sometimes at the expense of weaker countries. For example, in the 1800s, some critics said that Britain's push for free trade was a way for the British Empire to gain more power.
Other Ways to Trade
Besides free trade, here are some other ideas about how countries should trade:
Protectionism
Protectionism is when a country uses tariffs (taxes on imports) or other rules to protect its own businesses and industries from foreign competition. It can also be used to raise money for the government.
For example, the United States used high tariffs for a long time, especially in the 1800s and early 1900s, to protect its growing industries. More recently, some leaders like Donald Trump have brought back ideas of protectionism to try and boost local jobs.
Imperialism
Imperialism is when a powerful country controls other countries, often to benefit itself economically. This can involve unfair trade practices where the powerful country gets resources or goods cheaply from its colonies. For example, the British and Spanish Empires used trade practices that benefited their "mother countries" but often hurt their colonies.
Free Trade in Books
The idea of free trade was first clearly explained by Adam Smith in his 1776 book, The Wealth of Nations. He wrote that it makes sense for a family to buy something if it's cheaper to buy than to make it themselves. He said countries should do the same: if another country can make something cheaper, it's better to buy it from them. This idea was against the popular belief at the time that countries should try to export more than they import to get rich.
Later, David Ricardo added to this idea with his theory of "comparative advantage." He said that even if one country is better at making everything, both countries can still benefit from trading. Each country should focus on making what it can produce at the lowest "opportunity cost" (meaning what it gives up least to make that item). Then, they trade with each other. This way, both countries end up with more goods than if they tried to make everything themselves.
Henry George also wrote a famous book in 1886 called Protection or Free Trade. He argued that while free trade is good, simply removing tariffs isn't enough to help working-class people. He believed other changes, like how taxes are collected, were also needed.
Images for kids
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A political poster from the British Liberal Party showing their views on free trade versus protectionism.
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Average tariff rates in France, the United Kingdom, and the United States over time.
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British ships in Canton. Britain fought wars to force China to open up to trade.
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A chart showing United States real wages compared to trade as a percentage of GDP.
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A map showing colonial empires in 1945.
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A press conference about the European Union–Mercosur Free Trade Agreement.
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George W. Bush and Hu Jintao of China meet at an APEC summit in 2004.
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See also
In Spanish: Comercio libre para niños
- Economic globalization
- Fair trade
- Free market
- Free-trade area
- World Trade Organization
