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Why is free trade important?

Free trade improves people’s lives. It enables each person to specialise in doing what they do best. It also encourages competition in the supply of goods and services, which in turn incentivises people to develop better, less expensive goods and services. Over time, these improvements result in increases in output and productivity, which translate into higher levels of material well-being for the vast majority of those participating in the economy.

 

The Index of Economic Freedom estimates that “trade openness” (the degree to which economies are open to trade in goods, services, capital and people) is a significant determinant of GDP. The average GDP among the economies most open to trade is just under $24,000 per annum – more than twelve times the average GDP among the economies least open to foreign trade. For over 50 years, Hong Kong and Singapore have essentially been free-trade zones, which explains in large part why, during that time, they have grown from small fishing ports into enormously wealthy cities.

 

Policy-makers around the world learned from these examples and recognised how important the freedom to trade is in order to improve welfare and increase standards of living. As a result, trade barriers have been falling globally since the end of the Second World War. According to the World Trade Organisation, the average “applied” tariff in developed countries has fallen from over 10 per cent in 1980 to under 5 per cent today. The average tarrif applied in developing countries has fallen, too, from over 30 per cent in the early 1980s to under 15 per cent in 2000. Partly as a result of these falling barriers, trade flows have increased exponentially. The reduction and removal of trade barriers, particularly in some of the world’s currently fastest growing economies, has enabled more than 500 million people to lift themselves out of poverty in the past 30 years, including 400 million in China and tens of millions in India.

 

Great progress has been achieved in other parts of the world as a result of falling barriers to trade. The remarkable reduction of poverty in Chile – from 45 per cent of the country in 1987, to 14 per cent in 2006 – is thanks in part to the decision to unilaterally reduce trade barriers in the 1980s. New Zealand undertook serious reforms to liberalise trade across many sectors of the economy, particularly in agriculture. Now it is one of the world’s leading producers of a huge range of agricultural products. It has been one of the world's fastest growing economies over the past twenty years.

 

If every country removed all its trade restrictions, the costs of production and the cost of goods would fall substantially, benefiting especially the poorest. There would be higher levels of innovation, and the world economy would grow much more rapidly. Estimates indicate benefits of at least $500 million per year in additional growth.

 

Free trade also promotes peace. By enabling the creation of a nexus of relationships between people in different countries, free trade leads people to look at one another as partners in a process of economic development rather than as combatants over the spoils of war. This also works in aggregate, since the greater are the gains from trade between two countries, the costlier it is for those countries to go to war.

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