free trade

Economic system where governments do not interfere in the movement of goods between countries; there are thus no taxes on imports. In the modern economy, free trade tends to hold within economic groups such as the European Union (EU), but not generally, despite such treaties as the General Agreement on Tariffs and Trade (GATT) of 1948 and subsequent agreements to reduce tariffs. The opposite of free trade is protectionism.

The case for free trade, first put forward in the 17th century, received its classic statement in Adam Smith's Wealth of Nations (1776). According to traditional economic theory, free trade allows nations to specialize in those commodities that can be produced most efficiently.

The Ottawa Agreements of 1932 marked the end of free trade until in 1948 GATT came into operation. A series of drastic international tariff reductions was agreed in the Kennedy Round Conference 1964-67, and the Tokyo Round 1974-79 gave substantial incentives to developing countries. The 1980s recession, prompted by increased world oil prices and unemployment, swung the pendulum back toward protectionism, which discourages foreign imports by heavy duties, thus protecting home products.

Economists generally favor a system closer to free trade than now exists but recognize that developing countries might need some protection in establishing new industries and that there are health and national security reasons for some controls on trade. Among the damaging impediments to free trade, economists would cite dumping of products at an unrealistically low price, subsidy by governments of export-related industries, overly strict environmental standards for imported products, and other subtle restrictions in addition to tariffs and quotas. It is feared that the EU will erect barriers against external competition as it eliminates trade restrictions within the EU.