Free trade can be defined as a market model in which trade in goods and services between or within countries flow unhindered by government-imposed restrictions such as taxes, tariffs, or subsidies. Free trade, while not an new concept, has emerged in the post Cold War world as a global possibility with the growing economic interconnectedness between countries. But is it beneficial? Donald Trump has generally argued no, while President Obama pushed for the expansion of free trade agreements during his presidency. Does free trade have an overall, globally beneficial economic impact? Does it benefit all countries the same? Which countries tend to benefit and which tend to lose out? Should those that lose-out still adopt free trade due to the global benefits? Does it benefit all classes and workers the same? If some lose out due to free trade, are these losses outweighed by other benefits? What social costs or benefits does free trade entail? Are there any environmental impacts? Are there certain ways to adjust free trade to ensure the greatest possible benefits are achieved? Even then, do the costs outweigh the benefits?
“At the most basic level, trade is beneficial because it allows people to specialize in the goods and services they produce best and most efficiently. For example, we could conceivably all grow our own food and provide our own medical care. But because farming and medicine require special knowledge and skills, a far more efficient arrangement is for the farmer to specialize in growing food and for the doctor to specialize in treating patients.
Protectionism can be seen as the opposite of free trade. And, many studies conclude that protectionism has cost the world hundreds of billions of dollars annually in lost revenue as compared to what free trade could have accomplished.
Some criticize the results of some modern attempts at free trade, such as NAFTA. But, others contend that such examples may not be a fair example of “fair trade” as it would be ideally constructed, but rather of a highly managed form of trade. Therefore, the failures of managed free trade up to this point should not be used too sharply as a condemnation of the potential of real “free trade” in the future.
Free trade is generally known for decreasing prices by ensuring that countries and people specialize in their comparative advantages. Lower prices for consumers means that consumers can spend less on necessities, enabling them to spend more on other things in their lives, thus improving their standard of living.
While some producers certainly do lose-out from free trade, all consumers benefit (in addition to many producers benefiting). The weight of these benefits outweighs the costs to producers that can’t compete with foreign producers.
Free trade creates productive domestic jobs when it trades internationally with other countries. The restrictions placed on buying other foreign goods that have less marginal cost of production only encourage production loss by sustaining industries that have high production costs.
There are two ways to maximize profit, either to increase sales or to cut costs. The easier one to do is cut costs because increased sales is ultimately dictated by the laws of supply and demand. The biggest cost to most multinationals and large corporations is salary pay or wages, so to cut that cost jobs are sent overseas to developing countries where real wages are much lower and the price of doing business is adequately cheaper. In turn that deteriorates the number of existing jobs domestically.
Individuals have a right to engage in trade with other individuals across borders and without restrictions. This right is certainly protected within modern liberal democracies, it should now also be protected in the world at large between global citizens.
“Free Trade Is Fair Trade
An artificial distinction has been drawn between “free trade” and “fair trade.” The idea that free trade is fair only if countries share identical labor costs and economic regulations or if domestic producers are compensated for market losses to more competitive foreign producers is false. The economic benefits of free trade derive partly from the fact that trading partners are different, allowing any country embracing world markets a chance to be competitive. Free trade is fair when countries with different advantages are allowed to trade with a minimum of restriction and capitalize on those differences.”
When a country protects its industries, it favors its own people over foreign people. This in itself is discriminatory. Also, a country typically can protect itself in different ways against different countries, and can play favorites in this way. Protectionism, therefore, is inherently discriminatory.
Martin Wolf, Why Globalization Works?. Yale University Press. 2004. ISBN 0-300-10777-3. pp 53. – “Intelligent critics are prepared to accept that a sophisticated market economy works far better than any other economic system. But they would proceed to complain that markets encourage immorality and have socially immoral consequences, not least gross inequality. These views, albeit common, are largely mistaken…All complex societies are unequal. In all societies people (generally men) seek power and authority over others. But, among sophisticated societies with an elaborate division of labour, societies with market economies have been the least unequal and the inequality they generate has been the least harmful.”
Some free trade agreements force countries to privatize certain public service industries such as health care. If some public services, such as health care, are considered a right, however, this privatization of the industry can have the consequence of un-ensuring that this right is upheld.
” The U.S. jobs created by trade also tend to offer higher pay and demand greater skill than the jobs that are destroyed–although a downside is that, in the short run, the greater return to skills created by trade may tend to increase the wage differential between higher-skilled and lower-skilled workers and thus contribute to income inequality (Bernanke, 2007). The effects of trade on employment must also be put in the context of the remarkable dynamism of the U.S. labor market. The amount of “churn” in the labor market–the number of jobs created and destroyed–is enormous and reflects the continuous entry, exit, and resizing of firms in our ever-changing economy. Excluding job layoffs and losses reversed within the year, over the past decade an average of nearly 16 million private-sector jobs have been eliminated each year in the United States, an annual loss equal to nearly 15 percent of the current level of nonfarm private employment.6 The vast majority of these job losses occur for a principal reason other than international trade (Kletzer, 2001; Bernanke, 2004). Moreover, during the past ten years, the 16 million annual job losses have been more than offset by the creation of about 17 million jobs per year–some of which, of course, are attributable to the direct and indirect effects of trade. Truly, the U.S. labor market exhibits a phenomenal capacity for creative destruction”
Free trade creates many trade-related support-industries for exports and imports. This, combined with higher economic activity, helps replace jobs lost to free trade, and more than makes up for any wealth losses as well.
“‘threat effects’ arise when firms threaten to close plants and move them abroad while bargaining with workers over wages and working conditions. Employers’ credible threats to relocate plants, outsource portions of their operations, and purchase intermediate goods and services directly from foreign producers can have a substantial impact on workers’ bargaining positions.”
“This week, the Democratic-led Congress will have its first vote on the Bush administration’s latest NAFTA-like expansion, the US-Peru bilateral free trade agreement[…]Like many workers in Latin American countries, Peruvians face constant threats to their labor rights. Violations include discrimination against union organizers, illegal firings, and forced overtime without pay. Further, the new system of fixed-labor contracts and subcontracting radically undermines workers’ rights because it does not guarantee a 44-hour work week or labor standards. The new, much-talked-about labor language added to the US-Peru agreement does not solve this or many other key labor rights issues.”
While workers can be retrained, this is a time-consuming and expensive process that is not as simple as many Free Traders tend to argue.
When a worker is laid off from a job, they are typically put in a poor bargaining position to find a similar-paying job, both because they were laid-off and because they are likely to lack the necessary skills.
The competition within the global economy is a race to the bottom that pressures countries to lower their production cost and wages to the lowest possible. Competing against each other, developing countries constantly push the cost of their labor force down in order to attract foreign investors. The clear example of Mexico and China continuously lowering their workers wage in order to compete for the US garment market proves that empirically globalization leads to a race to the bottom
Free trade opens developing nations to international markets, enabling the goods of that country to be more widely sold abroad and, most notably, enabling and even encouraging foreign direct investments that are essential to growth.
“Evidence supports the idea nations more open to trade tend to be richer than those that are less open. Columbia University economist Arvind Panagariya wrote in a paper ‘Miracles and Debacles: Do Free-Trade Skeptics Have a Case?’: ‘On the poverty front, there is overwhelming evidence that trade openness is a more trustworthy friend of the poor than protectionism. Few countries have grown rapidly without a simultaneous rapid expansion of trade. In turn, rapid growth has almost always led to reduction in poverty.”
“Under the World Trade Organization’s “special and differential treatment” rule, many sub-Saharan African countries have been permitted to retain significantly higher import tariffs than rich countries. Combined with “preferential treatment” of their goods in rich countries’ markets, sub-Saharan African producers enjoy a substantial advantage over other foreign competitors.
Trade improves global efficiency in resource allocation. A glass of water may be of little value to someone living near the river but is priceless to a person crossing the Sahara. Trade delivers goods and services to those who value them most.”
“Fair competition means that free trade should not, as it does today, take place at the expense of workers and the environment. Unfettered free trade leads to business going where – other things being equal – wages are lowest, obligations to workers (worker safety, social insurance) least, and environmental regulations most lax. Consequently, in the competition to attract investment there is constant pressure on countries to relax both social and environmental regulations. Especially in poor countries this leads to the unfettered exploitation of workers and abuse of the environment.”
Christian Aid – “Trade liberalisation has cost sub-Saharan Africa US$272 billion over the past 20 years. Had they not been forced to liberalise as the price of aid, loans and debt relief, sub-Saharan African countries would have had enough extra income to wipe out their debts and have sufficient left over to pay for every child to be vaccinated and go to school.”
“Some critics worry that FTAs might divert the world away from multilateral trade liberalization and lead to the development of large, competing trading blocs–the United States and the Western Hemisphere, the EU and nearby countries, and Japan and its trading partners in Asia and the Pacific Rim–a result that would be inferior to multilateral free trade. Critics also note that the large size of the U.S. economy and its consequent desirability as a market give the United States a great advantage in negotiations with individual countries, especially small developing ones. The same is true for FTAs negotiated by the EU or Japan. The result of such unequal bargaining power can be that significant trade restrictions by the large countries remain in place that would more likely be eliminated under circumstances of more-equal negotiating power.”
“Have we forgotten? Hamilton created the ‘American System’ to end our reliance on England and Europe, because he and Washington believed economic independence was necessary for political independence. If we did not depend on Europe, they knew, we could stay out of Europe’s wars. Is all that Made-in-China junk at the mall worth the loss of our economic independence?”
“Do not Americans see what is happening to their country? As our dependency grows, our bonds of unity dissolve. ‘Buy American!’ is now stupid; buying cheapest is smart.”
Whenever a country outsources its vital national defense systems, it creates dangerous dependencies and vulnerabilities. It also jeopardizes the quality of a national defense system.
“Though my heart may be left of centre, I have always known that the only economic system that works is a market economy. This is the only natural economy, the only kind that makes sense, the only one that leads to prosperity, because it is the only one that reflects the nature of life itself. The essence of life is infinitely and mysteriously multiform, and therefore it cannot be contained or planned for, in its fullness and variability by any central intelligence.”
Globalization and free trade are in their infancy. The fact that it is not widespread, and that many developed countries continue protectionist policies, is actually the source of many problems for developing and poor countries. These poor countries could use more free trade at this moment, and to attribute the existence of free trade as the cause of these countries’ current plight, would be to misunderstand how limited globalization actually is today.
This is a common counter-argument against concerns surrounding job-loss associated with free trade. While job-loss does occur, the counter-argument is that it is well made-up for by the greater purchasing powers and living-standards of workers in general.
If a country specializes according to the principles advocated typically by free traders, it would put all of its eggs in one basket, exposing itself to risks in this way.
Thea Lee and Ralph Nader, The case against free trade; Happily never NAFTER, there’s not such thing as free trade. Earth Island Press, 1993 ISBN 156431694. Chapter 5, pp. 71. – “As for efficiency, it is not much to get excited about when the savings come from cheap labor rather than better technology or easier access to resources. In fact, as firms shift production to Mexico, lured by wages of $1 or $2 an hour, they lose some incentive to invest in cutting-edge techniques that improve productivity. For years, U.S. firms have been setting up “maquiladora” factories just over the Mexican border, and NAFTA would simply speed the trend.”
Globalization has promoted economic growth within developing countries. As economies have been more open to free trade they have recorded a better growth rate. Better integration in a global economy will be a key tool for reducing poverty in the world.
More open economies have had increasing economic growth and in this way global income inequality between countries has been reduced. Failure for this inequality to be reduced is largely caused by domestic policies, and less global integration which reaffirms the fact that more global economic integration will inevitably lead to less inequality between countries
As long as the circumstances of the poor are improved overall by Free Trade, why should it matter that the wealthy are gaining disproportionately? Any system that benefits everyone on some level is a good system.
Poor performance within the global economy has been proven to be linked with domestic factors within countries that close their economies from global free trade.Higher rates of success have been recorded among more open economies to global free trade , that have integrated more successfully in teh global economy
Studies have shown that despite the increasing rate of the global economy expanding there have been a significant number of countries where there has been no growth recorded over the past thirty years. Numbers also confirm that absolute poverty throughout the world has been increasing.
When massive amounts of capital can flow across borders via wire transfers, the potential for capital flight is created. This occurs when fears arise regarding a certain country and its markets. Investors from around the world may rapidly withdraw their investments, sending a country into financial bankruptcy. This is a major risk associated with free trade and globalization.
The gap between rich and poor countries has widened .Poor countries has lower incomes that developing and industrial countries positioning them at a high disadvantage when competing in a global economy.
It is wrong for free trade to disproportionately benefit the wealthy over the poor. The wealthy are already doing just fine in most countries. Any system that does this is corrupted and regressive.
“My conclusion is that it would be smart for the United States to abandon its current negotiating posture, which is that we will take down our trade barriers if you will take down yours.
That is a reciprocity-based strategy, and it is built on a faulty premise, which is that current protectionist measures are good for the United States, but we’re willing to abandon them if other countries abandon theirs, since we really want to get into their markets. That is like saying, I’ll agree to stop banging my head against the wall, but only if you stop banging yours. The implication is that it makes sense for me to bang my head, but I am willing to negotiate that asset away.”
If a nation decides to unilaterally adopt free trade, it runs the risk of other countries continuing to protect their domestic industries from foreign industries, which would put the nation taking unilateral action at a disadvantage. Such action is highly unlikely because it requires that a nation be unilaterally willing to put itself at a disadvantage.
Economic integration and increasing living standards are dependent on good governance. Globalization has put more pressure on governments to be accountable and promote free competition in order to achieve growth. Countries need to cooperate to achieve common goals and global governance can allow the possibility to avoid the emergence of more failed states.
Negotiations with foreign powers require that the slow and cumbersome legislative processes of many countries are bypassed. This is precisely why executive branches of government are created; to deal with foreign governments and make executive decisions when the immediacy of such decisions is necessary.
Free trade imposes corporate commercial values over governments. It undermines governments’ power and shifts the power to the corporate unregulated sector.
Free trade puts a high pressure on competing on a global market. This pressure for developing countries has placed them at crossroads forcing them to chose to keep their currency or pegging it to the dollar or even making the US dollar as their national currency. Giving up a symbol of national identity (one’s currency) for the ability to compete better in a global market is a clear example of a high intrusion of free trade on national sovereignty.
Free trade makes it impossible for a country to control the future of its economy. Multi-national corporations gain influence and the walls of sovereign economic control break-down.