Countries today are importing (buying) and exporting (selling) goods from each other more than ever before. This is because of an increase in “free trade.” If a country chooses to increase free trade, they are removing barriers that are stopping trade between countries.
Types of trade barriers include quotas and tariffs. Quotas impose a limit on how many of a good can be brought into a country. For example, a country may only let 500 German cars be bought.Tariffs are a tax on foreign companies who want to sell their good in your country. This makes it more expensive for the company to sell in your country so they sell fewer items.
WHY DO COUNTRIES HAVE TRADE BARRIERS?
The reason that countries often have these trade barriers is because they are protecting their own industries. If everyone is buying foreign imports, no one is buying the goods created locally so local businesses suffer and people become unemployed. For example, a higher tax on clothes imports means that local textiles industries are protected from competition.
However, free trade can also make people better off and the economy better off. This comes from the theory of comparative advantage.
To understand comparative advantage, it is important to understand opportunity cost.
Opportunity cost: the loss of other alternatives when one alternative is chosen.
You can only choose to do one thing at a time. When you are doing that thing, you give up all the other alternatives you could have been doing. Imagine two people:
Person A takes 1 hour to paint a wall and Person B takes 2 hours.
Person A takes 2 hours to build a wall and Person B takes 2 hours too.
There is nothing that B is “absolutely” better at than A. However, every time person A builds a wall, he is giving up the opportunity to paint 2 walls since it takes 2 hours.
Every time person B builds a wall, he is only giving up the opportunity to paint 1.
Therefore, A produces the most and gives up the least when he only paints. A has a comparative advantage in painting.
B gives up less than A when he builds and has a comparative advantage in building.
Therefore, if A and B both need houses built and painted, they are better off if they trade and A does all the painting while B does all the building than if they did everything on their own.
HOW DOES THIS RELATE TO FREE TRADE?
On the world market, if one country has a comparative advantage in making phones and the other in making shirts, it is more productive if they specialise and focus their economy on producing what they are good at and then trade to get what they need. This is because the opportunity cost is lowest. Each country is giving up the least they can to produce goods while still getting what they need by trading.
FREE TRADE’S GROWTH GLOBALLY AND IN AFRICA
Globally, free trade is increasing with 164 governments in the World Trade Organisation which encourages free trade. Agreements between countries to remove trade barriers are also increasing with 26 African countries signing an agreement in 2008 to be part of the African Free Trade Zone (AFTZ). Six countries in East Africa have also grouped together as the East African Community (EAC) and made a trade deal with the US.
Free trade is not perfect and not everybody is a winner from it. When trade barriers are removed, some businesses suffer from foreign competition who can produce goods more cheaply. For example, Uganda, which is part of the EAC, is trying to increase tariffs again on second-hand clothes to protect their textiles industry from the UK, US and China.
However, every country has something that they have a comparative advantage in and their opportunity cost is lower compared to other countries. Governments should encourage workers to move to industries where they have a comparative advantage. They should also choose which trade barriers to remove carefully to avoid large losses of jobs from foreign competition.