Free Trade - Free Trading Philosophy And Economics

The first thing you need to know about free trade is that it is the government that puts into place imposed restrictions on the amount, type, and variety of goods that are allowed into the country. Trade works on the premise of one country having a surplus of goods and another country needing those particular goods. A trade deal is worked out to the benefit of both parties.

Take for example the trade deal involving Arkansas, the world leader in rice production. Arkansas farmers need a buyer for their rice. The United States has a surplus, so it will allows the farmers and companies of Arkansas to ship their rice to areas of the world that want to purchase rice. The trade price is set and is due regardless of whether the country has an open trade agreement with the United States. If it does, then there may be no fees, taxes or tariffs placed on the rice.

If the country does not have an open free trade agreement with the United States, then negotiations must occur. The governments get together to decide what goods can be exchanged with each other for a set amount of money. Each government wants to make as much money as possible. A free trade agreement may hinder that money making ability if one country has a drastically lower price for goods than another country.

Again, take for example the rice from Arkansas. Farmers need to get rid of their surplus and the price is very, very low due to a bumper crop. They want to trade with China. Chinese farmers have had a bad year and rice prices are super high. The Chinese government wants to purchase the rice at a low cost but not so low that it would put the Chinese farmers out of business. Does that make sense? Free trade zones can be a good or a bad thing depending on how it is viewed.