2.2.2 - Free trade and its consequences

Free trade and consumer gains

Free trade is international trade without government-imposed barriers such as tariffs and quotas. It contrasts with protection, which uses restrictions or assistance to favour domestic production over foreign competition. Free trade does not mean goods are free of charge or that transport costs disappear.

Removing an import tariff reduces the tax included in supplying foreign goods. Removing a binding quota allows more imports. Additional supply and competition can reduce prices and increase the range of products available, giving consumers lower prices and increased choice. Households can buy more with the same income and obtain goods that domestic producers do not supply.

These are possible gains, not automatic promises. Retailers may retain part of a cost saving; exchange rates or shipping costs may change; and a barrier's removal matters less if it was already low. Choice may increase without every product becoming cheaper.

Lower input costs and wider markets

The effect of trade on a business depends on what it buys as well as what it sells.

Access to overseas raw materials, components and equipment can lower input costs. A bakery buying cheaper imported flour can produce bread at a lower cost, improving profit or allowing a lower selling price. A tariff that protects a flour producer may therefore raise costs for downstream bakeries; “domestic business” is not one uniform interest.

Firms also gain wider markets when other countries remove barriers to their exports. A machinery business can reach more customers, raising sales and potential revenue. Greater output may allow economies of scale and support investment, although success still depends on quality, competitiveness and demand. Removing barriers expands access; it does not guarantee orders.

An illustrative furniture manufacturer pays £50 per imported component before a tariff is removed and £40 afterwards. For 100 components, its purchase cost falls from £5,000 to £4,000. That £1,000 saving is evidence of a cost benefit, but it does not establish a £1,000 increase in profit unless sales revenue and other costs are unchanged.