Trade is the exchange of goods and services between countries. Domestic goods, which are sold abroad, are referred to as exports. Foreign goods, which are purchased by domestic consumers, are known as imports. Free trade refers to trade, which is allowed to flow freely between nations. The pattern of trade can be altered through the use of barriers to trade. Barriers to trade are factors that prevent imports and exports from being exchanged freely. Barriers to trade are often referred to as protectionism. This is because governments, to protect domestic firms from competition from imports, often use barriers to trade. The most common form of protectionism is a tariff, which is a tax imposed on goods which are imported into a country.
[...] This is because businesses may sell their goods abroad at prices which are below cost in order to try and drive domestic businesses out of the market, as they may be unable to charge low prices which are as low as those charged by the foreign firm. If this does occur, a foreign business may be able to establish itself as a monopoly. When a good is sold abroad at below cost price this is referred to as dumping. In the short term consumers may benefit if goods are ‘dumped' into their country, as they will be sold at a very low price. [...]
[...] Free trade can solve the problem of excess demand. This is because this excess demand can be satisfied by imports. If there is increasing demand for a particular good its price will rise. This is known as demand-pull inflation. If supply cannot be increased this problem of rising prices will worsen and prices will continue to rise. If there is free trade this problem can be solved because the good that is experiencing increasing demand can be imported from abroad. [...]
[...] If trade is free it will be cheaper for consumers to purchase these goods and there is likely to be more demand for these products, compared to if barriers to trade restricted the import and export of these goods. Therefore it may not be possible for many consumers to purchase some goods if countries did not trade. If protectionism is used imported goods will be more expensive. Tariffs increase the price of imports because they are a tax imposed on imports. [...]
[...] Due to a lack of competition a monopoly is able to charge high prices and improvements in the product they sell are unlikely. The use of free trade will mean that the power of the firm in that market will be reduced. This is because there will be more than one firm in the market because equivalent goods will be imported into a country. Free trade will keep the prices of these imported goods down and this will force the monopoly to alter their behavior and charge lower prices. [...]
[...] In order to correct the problem of externalities, taxes can be imposed on goods that emit externalities when they are produced or consumed. This will increase the price of the good but the problems caused by pollution will be reflected in the price of the good. However, if free trade is taking place tariffs cannot be placed on goods that cause negative externalities. Free trade can also result in the importation of goods which otherwise may be illegal if there were barriers to trade. [...]
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