Free trade is an important influence on global economics, bringing increased trading opportunities and strengthening connections between partner countries.
This guide walks through all you need to know about free trade and free trade agreements, and highlights some US government resources available to help you learn more.
We’ll also introduce Wise for business as a smart way to save money when you’re trading internationally. Get a free online multi-currency account to pay and get paid in dozens of currencies, using the mid-market exchange rate with no markups. More on that later.
What is free trade?
Free trade refers to an unrestricted flow of investment, goods and services between one country and another. National governments enter into free trade agreements (FTAs) with other countries to reduce or remove trade barriers and restrictions. The US has FTAs in place which cover some 40% of goods exported.
Where free trade is possible companies can sell their goods free from duty charges, or with the costs and taxes significantly reduced. This helps businesses to invest, and import and export goods and services without undue friction. It also means that governments can agree on standards for product safety, environmental protection and employee welfare for example. This can lead to improvements in partner countries – although changes in economies due to FTAs can also have negative impacts on individuals and communities. We’ll take a look at some key benefits and drawbacks in a moment.
Benefits of free trade
When countries sign free trade agreements they guarantee favorable treatment which gives benefits to companies trading internationally. The exact terms and how they impact will vary depending on the FTA and the markets involved, but some of the key benefits typically include:
- Reduced tariffs for importing and exporting goods and services – this can increase GDP and boost competitiveness of local industries
- Local companies can benefit from international expertise and technology
- Protection which means international investors are treated as favorably as local investors would be
- Cooperation on product standards, employee welfare rules and measures to protect the environment
- Protection of intellectual property
Free trade area
When countries work together to improve and protect free trade, they may be referred to as a free trade area.
The US has 14 free trade agreements in place, which cover 20 countries – the most famous of these is probably the North American Free Trade Agreement (NAFTA) which was updated in 2020 to become the USMCA. This agreement covers the US, Mexico and Canada, and was originally signed in 1994 to create a North American free trade area.
Free trade agreements
If you’re interested in international trade, exporting your goods or services to a country covered by a free trade agreement can be a good move. Depending on the specifics of the agreement you may get easier access to the market, and face lower tariffs which means your prices can be more competitive. The countries covered by existing FTAs are:
- Costa Rica
- Dominican Republic
- El Salvador
The US government has online resources to allow business owners to review FTA details by country, as well as plenty of information about how FTAs may benefit your business.
Pros and cons of free trade
While free trade can bring big benefits, it also changes the patterns of trade and this inevitably means changes in local economies and communities. Here are a few key advantages and disadvantages connected to free trade and FTAs.
- FTAs can improve national economies and increase GDP
- Free trade can make businesses more competitive
- FTAs may require governments to stop subsidizing industries which cuts costs
- Free trade should mean that ideas, technology and expertise can be transferred from one country to another, improving conditions in developing countries
- Free trade can cut consumer costs by removing tariffs on imported goods
- FTAs can mean that jobs and manufacturing move to low cost countries
- Free trade can mean small local businesses can no longer compete in their markets
- Without cooperation and enforcement, FTAs may result in poor working conditions, environmental degradation or theft of intellectual property
- Increased globalization could result in the loss of native cultures and traditional lifestyles
Free trade vs fair trade
It’s worth noting that free trade and fair trade – despite sounding similar – are not the same. Free trade is all about improving efficiency in markets, making it easier to trade, cutting costs and ultimately increasing economic output. Fair trade on the other hand focuses on protecting producers and enforcing standards to assure consumers that goods they buy are ethical.
There are various fair trade bodies working in the US and globally, which are often charities or nonprofits. These bodies set out standards for employee protection, environmental stewardship and sustainability, and may certify traders and producers to show that they meet the expectations laid out. Consumers can then buy these products knowing that they have been fairly produced.
All that said, FTAs do often contain clauses which are aimed at improving fairness and protecting individuals and the environment. For example, the USMCA requires all parties to uphold certain labor standards.
Free trade is a core building block of our increasingly globalized world. By increasing cooperation countries can benefit economically and with proper controls and enforcement, FTAs can also be used to protect individuals and the environment.
If you’re thinking of growing your business internationally then learning about FTAs and how they could help is a great start. You’ll also be able to cut your currency costs, and increase your profits, with a free Wise for business account. Make it easier to do business without borders, with Wise.