Answer to Question #49018 in Economics of Enterprise for Lan Des

Question #49018
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Expert's answer
The benefits of free trade include:
1. The theory of comparative advantage
This explains that by specialising in goods where countries have a lower opportunity cost, there can be an increase in economic welfare for all countries. Free trade enables countries to specialise in those goods where they have a comparative advantage.
2. Reducing Tariff barriers leads to trade creation
Trade creation occurs when consumption switches from high cost producers to low cost producers.
3. Increased Exports.
As well as benefits for consumers importing goods, firms exporting goods where the UK has a comparative advantage will also see a big improvement in economic welfare. Lower tariffs on UK exports will enable a higher quantity of exports boosting UK jobs and economic growth.
4. Economies of Scale.
If countries can specialise in certain goods they can benefit from economies of scale and lower average costs, this is especially true in industries with high fixed costs or that require high levels of investment. The benefits of economies of scale will ultimately lead to lower prices for consumers.
5. Increased Competition.
With more trade domestic firms will face more competition from abroad therefore there will be more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from charging too high prices.
6. Trade is an engine of growth.
World trade has increased by an average of 7% since the 1945, causing this to be one of the big contributors to economic growth.
7. Make use of surplus raw materials
Middle Eastern counties such as Qatar are very rich in reserves of oil but without trade there would be not much benefit in having so much oil. Japan on the other hand has very few raw material without trade it would be very poor.
8. Tariffs may encourage inefficiency
If an economy protects its domestic industry by increasing tariffs industries may not have any incentives to cut costs.

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