🛍 More choice
Consumers can buy goods and services from all over the world, including things that cannot be made at home, such as tropical fruit in a cold country.
Specialisation and Free Trade » Free Trade
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 6.1.2
- What free trade means
- The advantages of free trade: choice, lower prices, bigger markets, competition and economies of scale
- The disadvantages of free trade: harm to some firms and workers, dependence, dumping and environmental costs
- How to weigh both sides in an exam answer
🔒 Unlock Full Course Content
Sign up to access the complete lesson and track your progress!
Unlock This CourseWhat is free trade?
Imagine that every country let anyone buy and sell goods across its borders with no taxes and no limits on what can be bought and sold. A shop in one country could import shoes from a factory in another country as easily as it buys from a local factory. That is free trade.
In Specialisation by Country you saw that countries make more in total when each concentrates on what it is relatively best at. Free trade is what lets them swap their extra output.
Key terms:
- Free trade: trade between countries without restrictions.
- Dumping: selling goods in another country at a very low price, often below the cost of making them.
Example
Two neighbouring countries agree that goods from each can enter the other with no limits on amounts and no extra charges at the border. Trade between them is free.
Advantages of free trade
💲 Lower prices
Countries produce what they make at the lowest cost and sell it abroad. Imports can therefore be cheaper than home-made goods, so consumers pay less.
🌎 Bigger markets
Firms can sell to customers in many countries, not only at home. A small country with few buyers at home can gain a lot from selling abroad.
🏆 More competition
Home firms must compete with foreign firms. This pushes them to keep prices low, improve quality and come up with new ideas.
Economies of scale. A bigger market means a firm can make more. Remember, economies of scale are falling average costs as output rises. With free trade a firm can sell enough to enjoy them and lower its cost for each unit.
Notice the chain: free trade, then a bigger market, then more output, then lower costs, then lower prices. Examiners like to see a chain like this.
Disadvantages of free trade
- Competition harms some domestic firms and workers. A home firm may not be able to match cheaper or better imports. It may lose sales and close, and its workers may lose their jobs.
- Dependence. A country may come to rely on other countries for important goods such as food or fuel. If supplies stop or prices jump, it has few alternatives.
- Possible dumping. A foreign firm may sell at a very low price to drive out local firms. Once local firms have closed, the foreign firm may raise its prices.
- Environmental costs. More trade means more transport by ships, planes and lorries, which adds to pollution. Countries may also use up resources or damage land faster to produce goods for export.
A made-up example
Telmora is a small country that makes its own shoes. Its factories make 1 million pairs a year and sell them at $40 a pair. Telmora then allows free trade with Karvel, where large factories make shoes at a lower cost.
| Before free trade | After free trade | |
|---|---|---|
| Price of shoes | $40 | $25 |
| Choice of shoes | Telmora styles only | Telmora and Karvel styles |
| Telmora shoe factories | 10 open | 4 open |
Consumers gain: shoes are $15 cheaper and there is more choice. Some firms and workers lose: 6 factories have closed. Free trade has both advantages and disadvantages, so you need to explain both in an answer.
Worked example
Using the table, a family buys 4 pairs of shoes a year. How much do they save after free trade?
Saving per pair = $40 − $25 = $15. For 4 pairs: 4 × $15 = $60 a year.
Common mistakes
Saying free trade means "no trade rules at all". It means trade between countries without restrictions on what can be bought and sold.
Mixing up the benefits to consumers with the effects on producers. Lower prices help consumers, but they can harm home firms.
Writing "free trade is good" or "free trade is bad" with no balance. Most exam questions need both sides.
Listing a point with no explanation, such as "more competition". Say why it matters: firms must cut prices and improve quality.
Exam-style question
Dorvane is a small country with a few farms and one car factory. The government is considering free trade with a large neighbour whose firms produce cars and food at a low cost.
(a) Define free trade. [2 marks]
(b) Explain two advantages of free trade for consumers in Dorvane. [4 marks]
(c) Discuss whether free trade would be good for Dorvane. [6 marks]
Model answer
(a) Free trade is trade between countries (1) without restrictions (1).
(b) Consumers would have more choice (1) because they could buy cars and food from the neighbour as well as from Dorvane (1). Prices could be lower (1) because the neighbour's firms produce at a low cost and can sell for less (1).
(c) Free trade gives Dorvane a bigger market for its farms and lower prices for consumers (1). Competition may also push its firms to improve quality and cut costs (1). However, the car factory may be unable to match the neighbour's low costs and may close, so its workers would lose their jobs (1). Dorvane could also come to depend on imports for cars and food (1), and the neighbour's firms could dump goods at very low prices to push out Dorvane's firms (1). Overall, consumers gain, but some firms and workers lose, so Dorvane should weigh both before deciding (1).
Exam tip
In a "Discuss" question, give at least one advantage and one disadvantage, link each to Dorvane, and end with a short conclusion.