Introduction: Free trade is a policy that refers to a government does not interfere with international trade by applying tariffs, subsidies, quotas or other ways. It is a system that capital, labor and other resources flow freely between nations without barriers which could hinder the trade process, and also do goods, services. For a long time, free trade plays an important role during the process of the development of world economy, especially along with the rapid development of globalization and marketization (Winters, 2004). However, free trade does not mean that countries completely give up management of import and export trade and tariff system, but according to the foreign trade agreements, make the products in the market at home and abroad in equal status and have the same competitive chances. In tariff system, countries don't use protective duties, but still can collect revenue tariff in order to increase financial income. However, theorists and practitioners such as economists, politicians, industries, and social scientists hold divergent opinions about free trade. Proponents believe that free trade optimizes the efficiency of resource allocation, and then promotes national interest, increases social welfare. Opponents think free trade impairs domestic competition structure, and then reduces national interest, increases economic risk. So, the choices between free trade and protectionism are exist all the time during international trade. Now, a series of economic recession problems triggered by the 2008 finance crisis aggravate the debates. Free trade, good or bad, who are the winners and who are losers? In this essay, we will talk about the advantages and disadvantages of free trade, analyze the benefits and balance during the process of free trade.
1. The advantages of free trade
The development of free trade theory was on the basis of theory of comparative advantage (Costinot, 2009). Because of resources endowment, countries or regions should be dedicated to produce goods with low costs and high efficiency to exchange goods that they are unable to produce with lower costs and higher efficiency. According theory of comparative advantage, trading partners could get mutual gains from trade of goods and services. The theory of free trade mainly clarifies these views: Countries participate in the international division of labor, through the function that market mechanism expand, free trade can make all resources get the best configuration and realize the economic efficiency maximization. Free trade can expand the welfare of the whole society to the best, while protecting trade policies may only make benefits for a few interest groups.
Specifically, the implementation of free trade policy can affect participant in economic and social development. First of all, free trade can accelerate a country’s industry to select the superior and eliminate the inferior, so as to screen out companies that have significant comparative advantages of the industry, and promote the upgrading of the whole industry. Secondly, free trade make a country’s enterprises must compete with firms from the world, which will vigorously enhance their competitive ability. Again, in the long run, free trade also brings other levels of communication including science and technology, culture and thought and so on.
We can distinguish advantages brought by free trade through dividing into static interest and dynamic interest. Static interests include two aspects: (1) Countries can get goods that they can’t produce or have high costs through international exchange, so that consumers’ satisfaction achieves higher level. (2) Countries can get optimal resource allocation through international division of labor and comparative advantage. Dynamic interest refers to: Through effective international division of labor and exchange, a country can get scale effect, competition effect and learning effect, so as to promote...