Free Trade: The Path to Global Prosperity?

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Introduction

For a long time, countries have traded with each other. But the last four decades have seen the unparalleled explosion of international trade. The acknowledgment that engaging in international trade is beneficial to a nation has been the impetus that opens the door of nations to embrace free trade. Free trade is the unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties, and quotas. Free trade enables nations to focus on their core comparative advantages, hence generating maximum economic output and increasing income growth for the people. Consequently, the free trade policy variables are linked to growth rates (Cavusgil et al, 2012, p. 82). Free trade is the ultimate expression of the countries’ interdependence with each other which is necessitated by their differences. For instance, the countries in the Middle East such as United Arab Emirates, Saudi Arabia, and Qatar have enormous reserves of oil, the black gold. However, without free trade, their black gold would not benefit them. On the other end of the spectrum, Japan and Germany have very limited natural resources. Without free trade, Japan and Germany would be very poor, and their citizens would have limited access to consumer products and other commodities.

The comparative advantage principle, the foundation of free trade, is the rationale why countries pursue an international trade. It allows countries to specialize further and become better at what they do best. Comparative advantage is not just an idea both simple and profound; it is an idea that conflicts directly with both stubborn popular prejudices and powerful interest. This combination makes the defense of free trade as close to a sacred tenet as any idea in economics (Krugman, 1987, p. 131).

Despite the overwhelming evidence of its benefit, free trade remains one of the most hotly debated topics today. The proponents and supporters state that free trade accelerates development and promotes innovation. They stalwartly believe that free trade and market liberalization support economic growth and enhance the living standards of the people around the world. A vociferous chorus of disapproval against free trade had reverberated over the years, particularly from the interest groups such as labour unions, domestic producers of raw materials and other goods such as rice, dairy products, and steel. The opponents and critics argue that free trade is never truly free. It comes with high costs such as job losses, widening wage gap between skilled and unskilled workers, elimination of weaker industries, unfair competition, and so forth. Is free trade beneficial or is it detrimental to a country’s overall economy? Does free trade liberate the domestic market or does it enslave it? Is free trade the vehicle to global prosperity or it is the weapon of unfair trade? This report will provide answers to these questions about free trade using empirical evidences and arguments collated from a wide variety of sources: peer-reviewed research documents; studies and surveys conducted by reputable institutions; academic books and literatures written by experts and economists; news articles from the media; and other sources such as videos, opinions, etc.

This report will extensively and comprehensively describe the nature of free trade, explain its guiding principles, and outline its pattern amongst the countries in the world. This report will also analyze the rationale, impacts, and repercussions of the trade barriers and restrictions, as well as assess the overall benefits of free trade. Furthermore, the report will evaluate the observable positive impacts of free trade such as economic freedom, economic growth, expanded production possibilities frontiers, poverty reduction, and so forth. The report will also present various arguments against free trade such as escalating unemployment, inequality of income distribution, lack of global governance, the inefficiency of international institutions, and unfair advantage. Finally, the report will provide a critical analysis and conclusion of the empirical data and the arguments presented pertaining to this topic. The scope of the report is limited to free trade only and does not include the discussion of other related topics such as trade blocs, regional trade agreements, and so forth.

Free Trade: Principles, Patterns, Benefits, and Barriers

To fully comprehend free trade, it is imperative to examine and analyze its guiding principles, the patterns of trade, the barriers of trades, and the benefits of free trade.

Principles of Free Trade

The Scottish economist Adam Smith, the founder of modern economics, was a champion of free trade. His rationale of his absolute advantage principle was compelling: free trade allows countries to take advantage of their competitive advantage; and all countries benefit as each one specializes in the areas in which they excel (Cavusgil et al, 2012, p. 139). In 1819, English economist David Ricardo formulated the principle of comparative advantage which states that two countries that trade with each other will benefit even if one has an advantage over the other in producing everything that they exchange. Each can make itself better off if the superior producer concentrates on the products in which its advantage is relatively greatest and buys the other things for which its advantage is comparatively smaller (Mandelbaum, 2014, pp. 44-5). Associated with the comparative advantage is the opportunity cost which is the value of foregone alternative activity (Cavusgil et al, 2012, p. 141). If scarce factors of production are used to produce two goods, producing more of one good always requires producing less of the other good (Ossa, n.d., p. 5).

Countries may differ from one another in terms of technology, endowments, or preferences. Each country is unique and has something valuable to offer to the rest of the world. Ossa states that the Ricardian model emphasizes technological differences. The Ricardian model illustrates the fundamental insights of international trade theory. Furthermore, it highlights the concepts of absolute and comparative advantage and their roles in determining the patterns and the benefits from free trade (n.d., p. 3). The free trade relative price lies between both countries’ autarky relative prices. Each country exports the good in which it has a comparative advantage. It is immaterial for the pattern of trade which country has an absolute advantage (Ossa, n.d., pp. 38-9). Whether under a free trade or economic autarky, the Ricardian model of comparative advantage assumed that all goods be produced according to predetermined production technologies from basic labor (Ponanski, 1993, p.125).

Patterns of Free Trade

To examine the impact of free trade, we need to analyze the pattern of trade. According to Films for Humanities & Science (2007), 50 percent of trade flows between developed countries, 35 percent between developed and developing countries; and only 15 percent between developing countries. The developed countries in North America, Europe, and Asia tend to export high-tech goods such as computers, automobiles and airplanes; whereas the developing countries in Africa, Latin America and South Asia export basic staples such as rice, sugar, textile, etc. Some countries engage in trade more than others. Taiwan’s value of its export is 50 percent of its GDP; while Uganda’s is only 12 percent of its GDP. Taiwan views trade openness as essential to its economic progress while Uganda has been traditionally slow to open up its market to foreign competitors. In 1999, Brazil’s export was only 7 percent of its GDP, but today, Brazil is one of the biggest players in the global arena. East Asia engaged in export-oriented industrialization. In 2003, South Korea’s merchandise trade accounted for 35 percent of its GDP compared to a negligible 10 percent in the 1970s (Films for the Humanities & Sciences, 2007). This demonstrates that the developed countries are the biggest recipients of free trade and that free trade profoundly impacts the economies of various countries.

The European Union and the North American Free Trade Agreement best exemplify free trade. They have established open markets with very limited trade restrictions. Today, the majority of the countries are members of the World Trade Organization’s (WTO) multilateral trade agreements. However, most governments still impose some protectionist policies and regulations that are intended to support domestic producers, such as applying tariffs to imports or subsidies to exports (Nyandat, 2014, para. 1).

Barriers to Free Trade

All countries in the world engage in international trade since not one country is completely self-sufficient. However, not one country in the world practices completely free trade. The governments impose restrictions on trade to protect some domestic producers from foreign competitors. These industries are the ones with comparative disadvantages in production and they would be driven out of business by free trade (McGlasson, 2010). The government tries to achieve political, economic and social objectives by intervening with trade and commerce. This usually takes form in trade barriers that protect and benefits the industries, firms, and so forth. The underlying principle for these government-imposed barriers is protectionism: create and maintain jobs by protecting the industries from foreign competition, and to support home-grown or infant industries. However, government intervention is at odds with free trade. Market liberation and free trade support economic growth and national standards of living (Cavusgil et al, 2012, p. 192).

An example of a government intervention is the tariff and quota imposed by South Korea on its import of rice. “On September 18, 2014, the Korean Ministry of Agriculture, Food and Rural Affairs (MAFRA) issued a press release announcing the liberalization of its rice market through tariffication. Starting January 1, 2015, South Korea imposes a tariff of 513 percent on imports of rice above a set quota of 408,700 MT” (USDA Foreign Agricultural Service, 2014, para. 1). South Korea imposes this exorbitant rice tariff and quota to protect its farmers before the country opens up its rice market to foreign competition. Rice imports are a politically sensitive issue in South Korea that is strongly opposed by most farmers. This restriction will enable the domestic rice producers to stay competitive in the local market. The combination of tariff and quota will make the imported rice six times more expensive than its original price and up to three times more than that of local rice (Jun, 2014, para. 1).

However, this move may lead to adverse unintended consequences or unfavorable outcomes such as retaliation from other countries, the high cost of protectionism, limitation on consumer's choice, and so forth. Government intervention in the international marketplace impedes the flow of trade and investment. These interventions alter the competitive position of the industries and businesses alike. These government interventions and protectionism fall under the umbrella of a country risk.

A study conducted by Institute for International Economics in the 1990s revealed the high-cost protectionism. The study estimated that American consumers paid $1,285,000 annually for each job in the luggage industry that was preserved by trade barriers. This amount far exceeded the average earnings of a luggage worker. Furthermore, the study estimated that restrictions of foreign imports cost $199,000 per year for each textile job, $1,044,000 for each softwood lumber job, and $1,376,000 for every job in the benzenoid chemical industry (Hufbauer & Elliot, 1994). Spending such enormous amount of money is not fiscally sound. The cost of protectionism is high, and the average people usually pay the price.

Benefits of Free Trade

Free trade, the relative absence of restrictions to the flow of goods and services, has many tangible outcomes: consumers and firms have greater access to more products; more affordable imported products compared to local products; cost reduction in the firm’s expenses that leads to more profits and revenues; improvement in consumers’ living standards; and increase in overall prosperity of poorer countries (Cavusgil et al, 2012, p. 138). Living standards of both developed and developing countries predictably rise due to increased specialization, lower prices, the abundance of choices, enhanced utilization of resources, increased productivity, and so forth.

Free trade also provides opportunities for a more expansive market and increased access to market and technology. Free trade and globalization have also brought better health, as well as an active global civil society fighting for more democracy and greater social justice (Stiglitz, 2002, p. 214). Free trade, which is the removal of barriers and closer integration of economies, can be a force for the good and has the potential to enrich everyone in the world, especially the poor (Stiglitz, 2002, p. ix). Austan Goolsbee, former Director of the President’s Council of Economic Advisers and an Economics Professor at the University of Chicago’s Booth School of Business, says that the boom in economic participation is a direct result of the expansion of free trade.

It is not only access to the U.S., but it is also arguably the single most important thing for the development of emerging economies. The ability to export on trade has been a central pillar for bringing a billion people out of poverty in the last 15 years. China and India have seen a huge boom in development, moving up from poor countries to middle-income. Historically, free trade is fundamental for innovation. Countries that trade are more open outside of their borders. They are open to new ideas, which spark innovation and economic growth. (As cited in Larocco, 2012, para. 2)

Positive Impacts of Free Trade

For two centuries economists have persistently promoted free trade among countries as the best trade policy. Various studies have shown that free trade has positive overall impacts: economic freedom; economic growth; expanded potential possibilities frontiers; poverty reduction; and so forth.

Economic Freedom

One way of evaluating the effects free trade is to examine the country’s economic freedom which is the “absence of coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent of necessary for citizens to protect and maintain liberty itself” (Cavusgil et al, 2012, p. 203). According to the 2016 Index of Economic Freedom, the top ten countries have economic flexibility, strong legal system, market openness, and engagement in free trade. First is Hong Kong which continues to be a leading global business and financial hub due to its high level of market openness and fiscal discipline. Second is Singapore whose economic dynamism is due to its openness to global trade and investment. Singapore’s transparency in the regulatory environment and well-secured property rights provided commercial security for the innovative and resilient private sector.

Third is New Zealand whose modern and competitive economy benefits from a strong commitment to open-market policies that facilitate vibrant flows of trade and investment. Fourth is Switzerland whose openness to global trade and investment has enabled it to become one the world’s most competitive and innovative economies. The other nations topping the 2016 Index of Economic Freedom list are Australia, Canada, Chile, Ireland, Estonia, and United Kingdom (Heritage Foundation, 2016). All these nations have a commitment to open-market policies that facilitate global trade and investment flows and dynamic engagement with global commerce. This underscores the close relationship between limited government intervention, trade openness, and economic freedom. Hence, free trade is essential to economic prosperity and economic freedom.

Why is economy freedom important? Economic freedom is an essential element of liberty. Liberty is about more than just securing political freedoms. True liberty requires economic freedom which is the ability to profit from our own ideas and labor, to work, produce, consume, own, trade, and invest according to our own choices. Political liberty and economic freedom had always been intertwined, as demonstrated in the American Revolution against ‘taxation without representation’ or the economic policies in which they had no say (Holmes & Spalding, 2011, para. 1-2). Economic freedom brought upon by free trade is of utmost importance. In its absence, people will not be able to improve the conditions they live in.

Economic Growth

In 1970, the value of goods and services in world export was $0.4 trillion, a tenth of world output. In 2004, it increased to $10.8 trillion, a quarter of world output. This is due to the recent success of multinational trade agreements, and technological advancement reducing the time and cost of transportation (Films for the Humanities & Sciences, 2007). Free trade is the engine of economic growth worldwide.

Formerly insular economies such as China and India have expanded at exponential growth rates since they adopted free trade principles in the 1980s and 1990s, respectively. Free trade enables nations to concentrate their efforts on manufacturing products or providing services in which they have a distinct comparative advantage. Free trade enables a country to generate sufficient foreign currency to acquire the products or services that it does not produce indigenously (Nyandat, 2014, para. 3). The application of tariffs on imports, the provision of subsidies to exports, and other trade barriers only impede free trade.

One study conducted by Brookings Institute of more than one hundred countries in 50 years found a strong association between market openness and economic growth, both within the group of developing and the group of developed. Within the group of developing countries, the open economies had an average annual per-capita GDP growth of 4.49 percent, and the closed economies grew by 0.69 percent per year; whereas within the group of developed economies, the open economies grew at 2.29 percent per year, and the closed economies grew by 0.74 percent per year (Sachs & Warner, 1995, p. 35). Between closed and open group classifications, the closed group’s growth rate is similar for both the developing, with 0.69 percent, and the developed countries, with 0.74 percent. On the contrary, within the group of open economies, the developing countries’ growth is relatively faster, with 4.49 percent, compared to the developed countries, with only 2.29 percent. This indicates that open economies lead to economic convergence. Eleven of the fifteen open economies grew at more than 3 percent annually; whereas only four of seventy-four closed economies achieved such growth (Sachs & Warner, 1995, p. 36). This study demonstrates that countries that embrace trade openness prosper; hence, free trade is essential to economic growth.

Expanded PPF

Increasing free trade translates into expanded production possibilities frontiers (PPF) as showcased in Poland. Poland adopted the principle of comparative advantage by lowering its trade barriers and participating in international trade. In its trade expansion, Poland was producing and exporting the products it was best-suited to produce while importing products that other countries produce more efficiently. As a result, Poland’s production possibilities frontiers (PPF) for products and services shifted outward (Cavusgil et al, 2012, p. 192). Free trade enabled Poland to utilize its resources more strategically and efficiently. Due to trade openness, Poland’s average annual income increased, from $1625 in 1990 to $14,000 in 2012. However, this overall gain came with an adverse effect on Poland’s unemployment rate in some industries since the jobs producing these particular goods were shifted to other countries that make these goods more efficiently (Cavusgil et al, 2012, p.193).

A study was conducted in ten Central and Eastern European (CEE) countries, including Poland, during the period of 1993-2004, to evaluate the effectiveness of preferential trade liberalization in this region. The result indicated that all forms of trade liberalization positively contributed to the trade expansion of these countries. Trade liberalization in the CEE countries has been effective. Institutionalized trade liberalization on average has been more effective in stimulating trade than bilateral free trade agreements (Cieślik & Hagemejer, 2011, p. 537). Free trade’s positive effects significantly offset the negative ones. Based on the empirical evidence, free trade is beneficial to the economic growth and overall progress of countries worldwide.

Poverty Reduction

Vietnam illustrated the correlation between free trade and poverty reduction. A representative household survey was conducted in Vietnam in 1992 to 1993. It was followed by another survey of the same household six years later. When Vietnam opened up, its per capita GDP increased substantially, with no significant change in inequality. Hence, the income of the poor has increased while the level of absolute poverty has dropped dramatically, from 75 percent of the population in 1988 to 37 percent in 1998. This indicated 50 percent reduction of poverty in a decade. Vietnam’s market liberalization has resulted in its exports of rice which was produced by most of the poor farmers, and labour-intensive products such as footwear. Expectedly, the vast majority of poor households benefited directly from open trade system (Dollar & Kraay, 2004, p. 30).

Blinder states that Americans should be appreciative of the positive impacts of free trade more than most people, for U.S. is the greatest free trade zone in the world: New York provides banking; Michigan manufactures cars; Texas pumps oil and gas. The fifty states enjoy great prosperity by trading freely with one another. The United States surpassed Europe economically for more than two centuries because the United States engaged in the free trade of goods and services while the European countries protected themselves from their neighbors (Blinder, 2008, para. 9).

Criticisms against Free Trade

Despite free trade’s innumerable benefits, it is not free from problems and challenges. The free trade today is not infallible. However, the problem with free trade is not the principle but that the practice is flawed. The most incisive arguments against free trade are not purely financial: the international trade’s impact on the labour standards in developing countries; loss of national identity; destruction of cultural identity; and WTO violation of national independence (Films for the Humanities & Sciences, 2007). There are several criticisms against free trade: the flight of jobs; inequality of income distribution; lack of global governance; inefficiency of international institutions; the unfair advantage of some countries; and so forth.

Flight of Jobs

Critics argue that free trade leads to job loss and rising unemployment to many people in the world. U.S. textile and apparel industries face intense import competition, especially from Asia and Latin America. Employment in this industry in the U.S. fell from about 1.5 million people in 1990 to less than 1 million in 1999. An example of this import competition can be seen from one U.S. apparel manufacturer, Burlington Industries, which announced in 1999 that it would reduce production capacity by 25 percent due to increased imports from Asia. Burlington closed seven plants and laid off 2,900 people, about 17 percent of its domestic workforce (Ossa, n.d., p. 41). Similarly, Ford and General Motors have laid off thousands of workers in the United States due to global pressures by other car manufacturers. Ernst & Young relocated much of its accounting support work to the Philippines. Massachusetts General Hospital outsourced its CT scans and X-rays readings to the radiologists in India. This offshoring of jobs first began in the 1960s with the shift of U.S. and European manufacturing of cars, shoes, electronics, textiles, toys, etc. to cheap-labour nations such as Southeast Asia and Mexico. It was followed by the flight of service-sector jobs in accounting, software development, credit card processing, banking services, and health care in the 1990s (Cavusgil et al, 2012, p. 42).

When the result of rapid trade liberalization is that unemployment goes up, then the promised benefits of liberalization are likely not to be realized. When workers move from low-productivity, protected jobs into unemployment, it is poverty that is likely to increase, not growth (Stiglitz, 2006, p. 68).

Inequality of Income Distribution

One of the major concerns about free trade is the disparity of its economic impact: while it increases the national income, the poor may not receive proportionate benefits. Stiglitz states that while trade liberalization may make the country better off, it results in some groups being worse off. In the advanced economies, it is those at the bottom, the unskilled workers, who will be hurt the most (2016, p. 68). Dollar & Kraay (2004, p. 27) agree that the greater trade openness leads to growing household inequality; some poor households are harmed in the short run by trade liberalization. Hence, it is of utmost importance to complement open trade policies with effective social protection measures such as unemployment insurance. Since free trade raises national income, it strengthens the financial capacity of a country to provide these measures of effective social protection to ensure that all benefit from the development.

McKinnon recommends that the direct approach to free trade and centralizing foreign exchange allocations are implemented when a country’s domestic fiscal controls have been established. This gradual move is based on temporary tariff protection, and the highest tariffs can be eventually scaled down to a low uniform level. This should be done over a predetermined time frame of five to ten years. In conjunction, repricing material inputs should be implemented to segregate industries that could survive in the long run from those that may not. The benefit of raising material input prices at the start of the trade liberalization is that firms can immediately determine the relative factor costs (1991, pp. 179-181). The controlled liberalization differs from direct free trade strategy in which there is no interim protection for domestic finished goods. The declining tariff protection provides a smooth transition to free trade.

The government can play an essential role in mitigating market failures and ensuring social justice. In United States, East Asia, and other successful countries, the governments have performed their roles well: provided high-quality education; furnished infrastructure; strengthened the legal systems; and regulated the financial sector to ensure that capital markets provide safety nets to the people (Stiglitz, 2002, p. 218).

Lack of Global Governance

Economist liberals believe that economies flourish when markets are not under the control of governments. Competition maximizes economic advantage; whereas monopoly reduces it. Protectionism, trade barriers, and tariffs decrease competition. Mercantilism and monopolies hinder the development of economies and global commerce. Rodrik argues that the dichotomy between trade and rules is false and hides more than it reveals. He eloquently explains that market exchange cannot exist without rules imposed; where there are globalization and free trade, there are rules (2011, p. 9).

Although globalization and free trade have resulted in unparalleled levels of economic prosperity in both developed nations and emerging markets, they rest on unstable and shaky pillars. Moreover, Rodrik reasons that there is no global antitrust authority, no global regulator, no global safety net, and no global democracy: global markets suffer from weak governance, and are inclined to instability, inefficiency, and weak popular democracy (2011, p.1). A healthy global economic system necessitates a delicate compromise between these two.

Inefficiency of International Institutions

Renowned former chief economist of World Bank and Nobel Prize laureate Joseph E. Stiglitz explains that the problem with globalization and free trade lies with the ineffective management by the international economic institutes such as International Monetary Fund (IMF), World Bank, and World Trade Organization (WTO) which help set the rules of the game. Their management and administration often have served the interests of the more advanced industrialized countries rather than those of the developing countries. The demand for reform of the global financial architecture is palpable, from congressionally-appointed commissions to foundation-supported groups of economists (2002, pp.214-5). Free trade can be reshaped to realize its full potential for good, and the international economic institutions can be restructured to ensure that this objective is achieved.

Trade liberalization is supposed to enhance a country’s income by utilizing its comparative advantage, yet this is not what happens. It is easy to destroy jobs, and this is often the immediate impact of trade liberalization under the IMF programs. There is a lack of instantaneous job creation due to the shortage of capital and entrepreneurship. IMF programs entail exorbitant interest rates exceeding 20 percent or 50 percent (Stiglitz, 2002, p. 59). Inefficient industries may not survive due to international competition. Most developing countries lack the necessary education and financing. The financing needed for growth is simply too costly.

Unfair Advantage

Some critics argue that free trade promotes unfair trade due to the foreign competitors’ unfair advantage over the domestic producer and that the trade restrictions level the playing field. An unfair advantage occurs when the foreign producer is receiving subsidies from its own government, such that the costs are significantly reduced, and the foreign producer’s product could be sold very cheaply in the market. In 1997, the collapse of the Thai baht caused an extensive financial collapse in Southeast Asia. As Asian currencies lost most of their value, Asian products became cheap. In consequence, the American steel producers could not compete with extremely cheap Asian steel, so they sought protection from the U.S. government. However, this phenomenon did not constitute unfair advantage as the Asian producers did not plan for their currencies to lose 90 percent of their value (McGlasson, 2010).

The developed nations’ preconceived notion that the developing countries have an unfair advantage due to their low-cost labour is not entirely correct. Likewise, the developing countries complain vociferously of the difficulties in competing with the industrialized countries. The developing countries have offsetting disadvantages as well, such as lack of capital, poor infrastructure, lower skill levels, substandard technology, etc. (Stiglitz, 2006, p. 73). Fairness is a subjective word and is subject to interpretation. In addition, a country may dispute the “fairness” of another’s restrictions and may retaliate with restrictions of its own. This could eventually escalate into a trade war (McGlasson, 2010).

Most successful emerging markets in East Asia engaged in free trade slowly and in a sequenced way. These countries took advantage of international trade in exporting their products, but they dropped protective barriers carefully and systematically, eliminating them only when new jobs were created. In 2002, China was just dismantling its trade barriers after two decades of its march to the global market (Stiglitz, 2002, p. 60).

Conclusion

This report approached this topic with the intention of objectively examining the opposing sides and evaluating their arguments and evidence. After a thorough and careful analysis of the rationale and empirical data, this report concluded that free trade is fundamental for innovation. When countries embrace free trade, they are more open to new ideas which spark innovation and promote economic prosperity. The patterns of trade demonstrate that free trade leads to the exponential economic growth of the countries worldwide. The positive attitudes toward trade openness greatly contribute to this success.

Without free trade, there is no real economic freedom. The countries and their citizens are limited by their national boundaries. Protectionism is against economic progress and economic liberty because its power lies mostly in the hand of the few. Trade barriers impede economic growth, and in the long run, harm the very people that these trade barriers are supposed to protect. Protective trade policies protect only a few, and have cascading negative effects on the downstream industries which lead to higher prices of goods and job losses.

Protectionism is also a costly approach. The price of protecting jobs with trade barriers is high. The reduction of barriers leads to trade creation which essentially gives the consumers the ability to switch from high-cost producers to low-cost producers. The removal of tariffs results in lower prices for consumers; hence the price of imported commodities will be cheaper. Free trade also leads to increased exports which create jobs and foster economic growth. Free trade also increases a country’s economies of scale which occurs due to falling fixed cost, specialization of labor, volume discounts, financial economies, etc. (Cavusgil et al, 2012, p. 387). As a country specializes in manufacturing certain goods, productivity increases and cost per unit is reduced. This benefits the local economy and is very important in sectors that require substantial investment or with high fixed costs such as research and development. Free trade also leads to increased competition. Businesses that face more foreign competitors are compelled to reduce cost, increase efficiency, and enhance effectiveness. Increased competition puts a check on domestic monopolies and prevents the local firm from charging exorbitant prices.

On the other hand, trade barriers encourage inefficiency. If a country protects its domestic industry by increasing tariffs or imposing quotas, the industry may not have any incentives to minimize costs and increase efficiency. Trade barriers protect the interests of particular groups, at the expense of the majority of people. Moreover, trade barriers imposed by the governments are usually a result of pressure from interest groups who have personal motives, and the governments succumb to their demands based on political reasons, not based on economic ones.

The argument that free trade increases the wage gap between white-collar and blue-collar workers is unsubstantiated. It is mercantilism that makes the poor poorer or unemployed and the rich richer. Free trade creates opportunities by giving people the economic freedom to improve their economic status and enhance their standards of living. This is demonstrated by the tiger economies in East Asia which are vastly successful in free trades. Their success was staggering compared to the countries in Latin America whose economies are impeded by protectionism (Films for the Humanities & Sciences, 2007).

The criticisms against free trade are not without merit. Job losses still occur. The discrepancy in the income distribution is still pervasive. There is indeed a lack of global governance. The inefficiency of the international institutions is still prevalent. The asymmetry in countries’ advantages still exists. Free trade, in practice, is still not perfect. However, despite its shortcomings, free trade still brings enormous benefits to the society, to the nations, and to the world. The empirical studies and surveys showed the tangible benefits of free trade: it leads to reduction of poverty; it increases the countries' national income; it improves the overall standard of living. Although there are jobs that are lost due to free trade, new opportunities are created. High-productivity and high-paying jobs will eventually replace low-productivity and low-paying jobs.

The main challenge is to build an international system that includes all the nations of the world. Also, the governments must better reallocate the benefits of free trade and eliminate its unequal distribution of gains. It is the practice, not the principle, of free trade that is flawed. The concept of free trade is admirable: a global trade with no barriers. Free trade is an economic necessity, not an economic adversity. Free trade is beneficial to all involved. Free trade fosters economic freedom; hence, it liberates the market. Free trade is the path to global prosperity.

The report had thoroughly explained free trade: its nature, its principles, and its international pattern. The report also evaluated the benefits and the positive impacts of free trade, as well as its challenges and shortcomings. Furthermore, the report stipulated the criticisms against free trade and assessed the strength of their arguments. Lastly, the report provided an analytical summary of the relevant arguments and empirical data presented.

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