Cambridge IGCSE Economics 0455 – International Trade and Globalisation: Specialisation and Free Trade
International Trade and Globalisation
Specialisation and Free Trade
Objective
To be able to give a clear, concise definition of free trade and to understand its key characteristics.
Definition of Free Trade
Free trade is a policy under which governments do not impose restrictions such as tariffs, quotas, subsidies or other barriers on the import and export of goods and services between countries. In a free‑trade environment, market forces of supply and demand determine the volume and price of traded goods.
Key Features of Free Trade
No tariffs or import duties.
No quantitative restrictions (quotas) on the amount of goods that can be imported or exported.
No export subsidies that give domestic producers an artificial advantage.
Minimal non‑tariff barriers (e.g., standards, licences) that discriminate against foreign products.
Freedom for firms to choose where to locate production based on comparative advantage.
Why Countries Pursue Free Trade
Specialisation: Allows each country to concentrate on producing goods for which it has a comparative advantage.
Efficiency Gains: Resources are allocated more efficiently, leading to lower production costs.
Higher Real Incomes: Consumers gain access to a wider variety of goods at lower prices, increasing consumer surplus.
Economic Growth: Greater market access can stimulate investment and innovation.
International Cooperation: Reduces the likelihood of trade‑related conflicts.
Comparison: Free Trade vs. Protectionism
Aspect
Free Trade
Protectionism
Tariffs
None or very low
High tariffs imposed
Quotas
Absent
Quantitative limits on imports
Subsidies
Generally not provided to exporters
Export subsidies to support domestic firms
Consumer Prices
Typically lower due to competition
Higher because of reduced competition
Domestic Industry
Competes on efficiency and innovation
Shielded from foreign competition
Illustrative Diagram
Suggested diagram: A simple supply‑and‑demand diagram showing the effect of removing a tariff on the price of an imported good (shift from P₁ to P₂, increase in consumer surplus, decrease in government revenue).
Key Take‑away
Free trade removes artificial barriers, enabling countries to specialise according to comparative advantage, which leads to greater overall efficiency, lower prices for consumers, and the potential for higher economic growth.