This tutorial introduces the concept of free trade and examines the advantages and disadvantages for trading nations.

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1 Introduction Every day Australia and Australians benefit from trade. With a population of only 19 million people trade opens up a global market of more than five billion. Australia has a surplus of resources so we can sell the surplus to other countries and use the export dollars to buy other goods and services. People all around the world are eating Australian food, drinking our wine, using computers with Australian software and riding in Australian fast ferries. This tutorial introduces the concept of free trade and examines the advantages and disadvantages for trading nations. Content 1. Advantages of free trade Free trade occurs when there are no artificial barriers put in place by governments to restrict the flow of goods and services between trading nations. When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition and redirect, rather than create trade flows. 2. Increased production Free trade enables the countries to specialise in the production of those commodities in which it had a comparative advantage. With specialisation countries are able to take advantage of efficiencies generated from economies of scale and increase output. International trade increases the size of a firm s market, resulting in lower average costs and increased productivity.

2 3. Production efficiencies Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services. Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods. 4. Benefits to consumers Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services. The increased competition ensures goods and services, as well as inputs, are supplied at the lowest prices. For example in Australia imported motor vehicles would cost 25% more if the 1998 tariff levels still applied. Clothing and footwear would also cost around 14% more. 5. Foreign exchange gains When Australia sells exports overseas it receives hard currency from the countries that buy the goods. This money is then used to pay for imports such as electrical equipment and cars that are produced more cheaply overseas. 6. Employment Trade liberalisation creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold in the competitive environment. With free trade many jobs have been created in Australia, especially in manufacturing and service industries.

3 7. Economic growth The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth. 8. Disadvantages of free trade Although free trade has benefits, there are a number of arguments put forward by lobby groups and protestors who oppose free trade and trade liberalisation. These include: * With the removal of trade barriers structural unemployment may occur in the short term. The Australian textile industry will face this problem when tariffs are reduced from 25 percent to 7 percent in However it is interesting to note that when tariffs increased greatly in the period for textiles and footwear employment in the sector fell by for the same period. * Increased domestic economic instability from international trade cycles, as economies became dependent on global markets. The Asian economic crisis in 1998 and economic slowdown in the global economy in 2001 illustrate this situation. * International markets are not a level playing field as countries with surpluses may dump them on the world markets below cost. Some efficient industries may find it difficult to compete for long periods under such conditions. * Developing or new industries may find it difficult to become established in a competitive environment with no short-term protection polices by governments. * Free trade can lead to pollution and environmental problems as companies fail to include these costs in the price of goods.

4 FACTS How Australia has benefitted from free trade * Over the past decade Australia's ratios of exports and imports to GDP have each risen from around 15 percent to 20 percent. * The expansion of exports has strengthened Australia's industrial base. * Greater access to imports has benefitted consumers and businesses by widening the choice of products available and by boosting the living standards for many Australians. * Reducing tariffs over the past decade has resulted in savings of $1 000 per year to the average Australian family. * Exporters pay more to workers and sell more per worker than non-exporters. Having a bigger market to sell to means that a business can sell more, earn more profits and pay higher wages. * Export growth has been essential to economic growth and job creation. Over jobs were created between and According to one study the removal of all tariffs would create another jobs within the next two years. Source: Department of Foreign Affairs and Trade Some current developments in the Asia Pacific region * Japan has been negotiating with Singapore a free trade agreement, and has studied the feasibility of agreements with Mexico and Chile. * The United States concluded a free trade agreement with Jordan in October 2000, and is negotiating bilateral free trade agreements with Singapore and Chile. In 1998, leaders of 24 countries from the Americas committed to negotiate a Free Trade Area of the Americas by * New Zealand in 2000 conducted a joint feasibility study on a free trade agreement with the Republic of Korea and expressed interest in agreements with Canada and the United States. It is examining a three-way agreement with Singapore and Chile. * Singapore is pursuing a number of free trade agreements. Its free trade agreement with New Zealand has been concluded and it has commenced bilateral negotiations with Australia, Japan, Mexico and the United States. It is exploring a possible free trade agreement with Canada. Singapore has indicated interest in negotiating a free trade agreement with the European Free Trade Association (the European Union, Switzerland, Norway and Iceland.) Source: Extracts from Opening Markets, The Benefits for Australia Department of Foreign Affairs and Trade 2000.

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