Benefits and Costs of Free Trade Agreements in the UK

First off, what exactly are free trade agreements? Free trade agreements are used to encourage trade and are agreements between countries to allow the movement of goods and services with no tariffs.


So, why exactly are free trade agreements beneficial to the UK and its economy? Free trade is essential for the UK as it increases competition within the economy. This is because firms are incentivized to provide better goods and services than their competitors.


This, therefore, incentivizes firms to improve efficiency thus allowing them to provide the best quality goods at fairly low prices which increases levels of spending in the economy and therefore increases aggregate demand which could lead to an increase in economic growth for the UK.


Free trade agreements could also be beneficial to the UK due to the fact that they allow them to specialize in those goods where they have a comparative advantage, thereby lowering opportunity costs and helping the UK to achieve much higher growth.


Adam Smith, the Founder of Modern economics and author of the novel ‘The Wealth of Nations’ had mentioned the following about his opinions on how free trade agreements would be beneficial in Scotland’s wine industry.

“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

- The Wealth Of Nations, Book IV, Chapter II


Harvard Professor and one of the world's most prominent economists, Gregory Mankiw, also did share his opinions on the benefits of free trade agreements, mainly focusing on the importance of specialization and how higher growth would be achieved;


“Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.”

- Professor Gregory Mankiw


However, on the other hand, free trade agreements could also cause short-term structural unemployment in the UK. This is due to the fact that the removal of trade barriers does mean that imports become much cheaper. This causes the levels of demand for domestic goods to decrease which could then potentially lead to local businesses shutting down, as well as local businesses firing their workers in order to compensate with the low levels of demand, leaving the workers to become redundant.


This would therefore cause an increase in unemployment in the UK which could potentially also lead to reduced economic growth for the UK due to lower disposable incomes and lower standards of living.


Free trade agreements could also possibly lead to the UK becoming more vulnerable as they could get highly dependent on certain goods and services which could lead to political pressure in case the agreement gets cut off or severed.


Overall, free trade agreements bring various opportunity costs into the UK such as achieving higher economic growth due to increased competition, as well as negative consequences such as the possibility of having short term structural unemployment, not to forget the increased budget deficits due to lower revenue coming from taxes as there are no tariffs in place.


Written by Jiya Uttamchandani


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