The idea of free trade goes back to the invisible hand described by Adam Smith in the late 1700s. The idea states that markets can naturally correct themselves without regulation. However, current free trade principles go beyond strict monetary transactions.

Identification

Free trade, also called "trade liberalization," means reducing the restrictions on imports, such as duties and tariffs, according to the U.S. Department of Commerce's International Trade Administration.

Types

Free trade occurs through agreements between two countries, called a bilateral agreement, or among several states, called a multilateral agreement, according to George Kent, professor of political science at the University of Hawaii at Manoa.

Features

Free does not just mean lowering import taxes. Parties in a free trade agreement also set environmental regulations, labor rights, patent protections and foreign direct investment, according to Kent.

Effects

Theoretically, free trade works much like capitalism, but on a grander scale. If people of the world could move and trade without restrictions, production would become more efficient as actors find their niche.

Theories/Speculation

In practice, free trade may not work as well the theory behind it because real-world conditions are much different than the ideal environment. Actors who start at an advantage may see an increasing percentage of wealth as they take advantage of weaker parties.

Source:

U.S. Department of Commerce's International Trade Administration; U.S. Free Trade Agreements

Kent, George; What Is Free Trade? Where Is Trade Free?