Although transportation costs might be an issue, trade does not always have to be over long distances. No country in the world is so isolated that they would not be able to trade due to high transportation costs.
STATEMENT:
I will now be moving onto why free trade would be beneficial to the world economy. My statement will be split up into two arguments; 1) That competition fosters lower prices, efficiency in production, and innovation; and 2) that interdependence between nations undercuts the likelihood of war by making conflict too costly.
Barriers to enter a market, which is a protectionist measure, give the opportunity for firms to reduce output and raise prices. Higher prices are obviously a disadvantage for consumers, especially when we, the consumers, could be paying a lower price with foreign competition. Protecting domestic markets is not only unfair to one’s own consumers, but also for the other nation’s consumers that you should be trading with. For example, car manufacturing is normally either a monopolistic or oligopolistic market within national boundaries, but with free trade and increased competition, the prices of cars lowers considerably, while output rises. This is due to the fact that monopolies are inefficient and are able to take advantage of consumers through higher prices; thus competition rectifies this issue through lower prices. Furthermore, other than creating lower prices for consumers through competition, free trade can also create efficiency in the production of a good or a whole industry. This happens as domestic companies have to modernize plants, production techniques and technologies to keep themselves competitive. With foreign companies a potentially offering lower price, due to a lower opportunity cost, domestic companies have no choice other than to become more efficient in utilizing their resources, such as labor, in order to stay afloat. Producing more efficiently not only helps ensure the security of domestic companies, but also creates less negative externalities, such as a waste of materials and pollution. Taking NAFTA (North American Free Trade Agreement) as an example, when Canada completely opened up its markets to American and Mexican goods, Canadian labor productivity rose, as a whole, by 0.6% annually, and by 2.1% in the most affected areas (industries with high tariffs). Innovation also thrives in free trade, as to be better than your competitor, sometimes you have to offer a better product. But, better products can only be offered when there are people who create them; in other words innovation is encouraged in a free market.
Moving onto my second point of interdependence between nations; a prime example of this would be the EU, the European Union. A bit of historical background can help us understand why the EU was formed and how interdependence, through free trade has benefitted Europe. Since Europe had been plagued with war for the better part of the 20th century, they finally realized that nothing came out of it. Thus, the EU was formed as a collaborated effort in uniting Europe. The EU functions under a single market through a standardized system of laws which apply to all member states. As we see today Europe is no longer the hampered by war which has allowed them to grow economically. Europe has been revitalized with the creation of the EU, as free trade and interdependence created peace between nations. If a conflict arises, and an EU member attacks another member, the aggressor can be punished in the form of trade barriers, like high tariffs or even trade embargos, as the easiest way to cripple a nation is by hurting their economy. This example related back to the theory of comparative advantage and specialization as my counterparts have already mentioned. Thus, free trade creates interdependence between nations, which in turn creates peace due to the fear of the economic costs of war and possible trade embargos that would cripple a nation’s economy.