How Does Free Trade Work?

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As the buying and selling of goods includes more developing nations and as population growth reshapes markets, the importance of global trade continues to grow. The politics of trade include governments, businesses and agencies that wish to adopt or abandon certain trade policies of barriers. Free trade is a system in which such barriers are completely absent, and goods can flow freely across borders.

Definition

Free trade is a system in which there are no barriers to trade that distort the normal prices and availability of goods based on supply and demand. Nations that agree to engage in free trade do not impose tariffs, additional taxes or special requirements for import on goods from other countries. They also refuse to allow monopolies domestically that would make it difficult or impossible for international producers to enter the marketplace. In fair trade, individual buyers set prices by collectively choosing which goods to buy when confronted with domestic and imported options at prices set by the manufacturers and retailers free from government interference.

Implications

Free trade applies to more than just the exchange of goods and services between countries. It also extends to other elements of the production of those goods, such as labor management. When nations enter into free trade agreements, they may adopt universal standards for worker wages or workplace safety. This prevents one country from gaining a competitive advantage for its businesses by disregarding human rights. Free trade also includes shared environmental standards that require each participant to adhere to the same industrial production guidelines.

Function

Free trade is possible only when two or more nations enter into a free trade agreement. These accords are complicated treaties with wide-ranging economic implications and often take months or years of negotiating to complete. A free trade agreement does not automatically grant permission for every business in each country to sell its products in the other countries. Instead, the businesses must still meet regulatory standards in the countries where they wish to do business, and they must remain legally liable for the products they sell there.

NAFTA

In the United States, one of the most significant trade agreements is the North American Free Trade Agreement (NAFTA). This agreement includes the United States, Canada and Mexico. It includes environmental and labor law provisions as well as a policy of open trade across borders. NAFTA became law in 1994, but the trade restrictions and tariffs were not entirely removed until 2008 at the end of a slow implementation process. As of 2011, NAFTA is the largest free trade agreement in the world in terms of the number of citizens it affects and the value of goods traded between nations under its protection.

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