Free Trade (Cambridge (CIE) IGCSE Economics): Revision Note

The advantages of free trade

• Free trade is the exchange of goods and services between countries without any trade barriers, such as tariffs, quotas or import bans

• This means countries can buy and sell freely with each other, allowing for more open access to foreign markets

• Greater choice

  • With access to a wider variety of goods/services, the standard of living improves

• Lower prices

  • With international competition prices fall, giving households the ability to buy more

• International cooperation

  • Required for trade, it helps countries to build better relationships, which leads to lower levels of hostilities

• Flow of new ideas

  • Innovative ideas and technology can be shared between countries

• Access to resources

  • Output can increase and costs of production can fall with increased access to raw materials

• Increased efficiency

  • International competition allows the most efficient firms to emerge and this improves the use of global resources

• Economic growth

  • Exports are a key component of the gross domestic product of many countries and an increase in exports can lead to economic growth

• Economic development

  • Increased output leads to lower levels of unemployment, which leads to higher incomes and a higher standard of living

The disadvantages of free trade

• Harm to domestic industries

  • Without protection from foreign competition, local firms may struggle to survive

  • This can lead to business closures and job losses in certain sectors

• Over-dependence on imports

  • Countries may rely too heavily on other nations for essential goods, such as food, fuel or medicine

  • This can be risky if global supply chains are disrupted

• Job losses

  • Free trade can lead to structural unemployment as less competitive industries shrink or shut down in the face of cheaper imports

• Worsening trade balance

  • Some countries may import more than they export, leading to trade deficits which can create long-term economic problems

• Unequal gains

  • While some countries and firms benefit, others may be left behind

  • Smaller or less developed economies can find it hard to compete fairly

• Environmental damage

  • Transporting goods across the world increases carbon emissions

  • Also, some countries may ignore environmental standards to stay competitive

• Exploitation risks

  • Firms may shift production to countries with lower wages and weaker labour laws, leading to poor working conditions and inequality