Free Trade

Free trade leads to all countries producing exactly those goods for which they have comparative advantages; i.e., producing them with less resource input than other goods. It thus increases people’s consumption options compared to a situation without trade (autarky). In the longer term, specialization through trade also allows for stronger productivity growth.

Infografik, Newsbild, Containerschiff
Infografik, Newsbild, Containerschiff

The idea of free trade goes back to David Ricardo, one of the founding fathers of economics, at the beginning of the 19th century. He came to the conclusion that tariff barriers to trade, such as customs duties, are harmful because the resulting disadvantages for consumers cannot be offset by advantages for producers. Accordingly, free international trade leads to an optimal division of labor and the greatest possible prosperity for all countries involved.

In practice, states conclude free trade agreements for this purpose, which today are no longer limited exclusively to the dismantling of tariffs, but above all also include non-tariff trade barriers in the trade of goods, services, and capital. In addition, intellectual property rights play a central role. Trade policy is currently facing major challenges: rising protectionism, the departure from multilateral agreements, and not least Covid-19 have shaken up trade flows. There has been a massive increase in skepticism about free trade and the international division of labor.

“The EU should be united in supporting and promoting the rules and standards of international institutions. Also, what the EU needs when negotiating agreements is more pragmatism and less cherry-picking.”

Prof. Dr. Lisandra Flach, Director of the ifo Center for International Economics

Contact
CV Foto von Lisandra Flach

Prof. Dr. Lisandra Flach

Director of the ifo Center for International Economics
Tel
+49(0)89/9224-1393
Fax
+49(0)89/985369
Mail
flach@ifo.de