I have no experience in this, but, couldn’t they just agree to export and import all the things they need just like that and that’s it?
In: Economics
Country A has a significant number of peanut farmers; not enough to supply everyone with peanuts, but certainly enough to create a market. Country A’s domestic peanut price will be very high because demand is much higher than supply. Country B produces an enormous amount of peanuts, so many that they could never consume all of them. The price for peanuts will be very low because there is more supply than there is demand (let’s say B can produce much more because of differences in climate, labor laws, etc… such that it is easier and cheaper to grow them in B). It seems logical that the two countries should simply agree to a free trade deal: buyers in A can purchase all the peanuts they want from sellers in B at whatever price they agree to.
But in an unregulated free trade deal, this would dramatically drop the price of peanuts in A (now that the high demand has a virtually unlimited supply), which is certain to harm peanut producers in A (A’s farmers have been relying on high prices to keep their operations profitable).
This means that A and B need to find a way to mutually benefit without putting tens of thousands of farmers out of business. They do that, in part, by agreeing to regulate the price through tariffs (taxes on imported goods) or subsidies (tax breaks on specific domestic industries). Every detail of those numbers need to be negotiated, along with any other terms, to ensure A’s farmers don’t go out of business, but B’s farmers can still make a profit by selling in A.
Repeat this process for every conceivable good that could be traded between the countries, and you’ll quickly build up a complex agreement.
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