global free trade disadvantages essay

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Pros and Cons of Free Trade Agreements

Free trade grows economies, but it increases job outsourcing

Advantages of Free Trade Agreements

Industry expertise, disadvantages of free trade agreements, how to create effective trade agreements, frequently asked questions (faqs).

The Balance

Free trade agreements are treaties that regulate the tariffs , taxes, and duties that countries impose on their imports and exports. The most well-known U.S. regional trade agreement is the United States-Mexico-Canada Agreement (USMCA) which replaced the North America Free Trade Agreement (NAFTA) effective July 1, 2020.

The advantages and disadvantages of free trade agreements affect jobs, business growth, and living standards.

Key Takeaways

• Free trade agreements are contracts between countries to allow access to their markets.
• FTAs can force local industries to become more competitive and rely less on government subsidies.
• They can open new markets, increase gross domestic product (GDP), and invite new investments.
• FTAs can open up a country to degradation of natural resources, loss of traditional livelihoods, and local employment issues.
• Countries must balance the domestic benefits of free trade agreements with their consequences.

Free trade agreements are designed to increase trade between two or more countries. Increased international trade has the following six main advantages.

Increased Economic Growth

In 2003, the U.S. International Trade Commission estimated that NAFTA could increase U.S. economic growth by 0.1% to 0.5% per year. The USMCA is a modern trade agreement that recognizes the influence of technology on economies. It changed many original NAFTA rules and processes but also kept others intact.

According to a 2019 report, USMCA is expected to raise GDP by $68.2 billion (0.35%) and employment by 176,000 jobs (0.12%), with a likely positive impact on all broad industry sectors in its first five years.

More Dynamic Business Climate

Without free trade agreements, countries often protected their domestic industries and businesses. This protection often made them stagnant and non-competitive on the global market. With the protection removed, they became motivated to become true global competitors.

Free trade agreements also contribute to foreign investment. Investors will flock to the country. This adds capital to expand local industries and boost domestic businesses. It also brings in U.S. dollars to many formerly isolated countries.

Lower Government Spending

Many governments subsidize local industries. After the trade agreement removes subsidies, those funds can be put to better use.

Global companies have more expertise than domestic companies to develop local resources. That's especially true in mining, oil drilling, and manufacturing. Free trade agreements allow global firms access to these business opportunities. When the multinationals partner with local firms to develop the resources, they train them in the best practices. That gives local firms access to these new methods.

Technology Transfer

Local companies also receive access to the latest technologies from their multinational partners. As local economies grow, so do job opportunities. Multinational companies provide job training to local employees.

The biggest criticism of free trade agreements is that they are responsible for job outsourcing. Here are some of the primary disadvantages.

Increased Job Outsourcing

Why does this happen? Reducing tariffs on imports allows companies to expand to other countries. Without tariffs, imports from countries with a low cost of living cost less. It makes it difficult for U.S. companies in those same industries to compete, so they may reduce their workforce. Many U.S. manufacturing industries did lay off workers as a result of NAFTA. ​​​​One of the biggest criticisms of NAFTA is that it sent jobs to Mexico.

The USMCA sought to address and correct these criticisms, requiring—for the first time in a trade agreement—that 40% to 45% of North American auto content be made by workers earning at least $16 per hour.

Theft of Intellectual Property

Many developing countries don't have laws to protect patents, inventions, and new processes. The laws they do have aren't always strictly enforced. As a result, corporations often have their ideas stolen. They must then compete with lower-priced domestic knock-offs.

Crowding Out Domestic Industries

Many emerging markets are traditional economies that rely on farming for most employment. These small family farms can't compete with subsidized agri-businesses in developed countries. As a result, they lose their farms and must look for work in the cities. This aggravates unemployment, crime, and poverty.

Poor Working Conditions

Multinational companies may outsource jobs to emerging market countries without adequate labor protections. As a result, women and children are often subjected to grueling factory jobs in sub-standard conditions.

Reduced Tax Revenue

Many smaller countries struggle to replace revenue lost from import tariffs and fees.

Degradation of Natural Resources

Emerging market countries often don't have many environmental protections. Free trade leads to the depletion of timber, minerals, and other natural resources. Deforestation and strip mining reduce their jungles and fields to wastelands.

In addition to threatening environmental resources, free trade agreements threaten native populations as well. As development moves into isolated areas, indigenous cultures can be destroyed. Local peoples are uprooted. Many suffer disease and death when their resources are polluted.

Free trade agreements are designed to combat trade protectionism , which has its own downsides. Trade protectionism produces high tariffs and only protects domestic industries in the short term. In the long term, global corporations will hire the cheapest workers wherever they are in the world to make higher profits.

A better solution than protectionism is the inclusion of regulations within trade agreements that protect against the disadvantages.

Environmental safeguards can prevent the destruction of natural resources and cultures. Labor laws prevent poor working conditions. The World Trade Organization enforces free trade agreement regulations.

Developed economies can reduce their agribusiness subsidies, keeping emerging market farmers in business. They can help local farmers develop sustainable practices. They can then market them as such to consumers who value that.

Countries can insist that foreign companies build local factories as part of the agreement. They can require these companies to share technology and train local workers.

What was the purpose of NAFTA?

NAFTA was created to promote cross-border trade among the U.S., Mexico, and Canada. The three countries sought to create a free trade agreement that would foster competition, increase investment opportunities, and create procedures for handling trade disputes. Although it had some serious downsides, NAFTA largely succeeded in achieving those goals. The United States-Mexico-Canada Agreement (USMCA) officially replaced NAFTA on July 1, 2020, to achieve the modern trade goals of the digital age.

What is the difference between free trade and fair trade?

Although these terms are often confused, there are significant differences between free trade and fair trade. Free trade agreements are aimed at fostering open trade between nations to improve economic growth among all involved parties. The fair trade movement is focused on fostering economic equity on a global scale so that the workers who make goods in other countries receive fair wages and improve their lives and communities.

Office of the United States Trade Representative. " United States-Mexico-Canada Agreement ."

United States International Trade Commission. " The Impact of Trade Agreements: Effect of the Tokyo Round, U.S.-Israel FTA, U.S.-Canada FTA, NAFTA, and the Uruguay Round on the U.S. Economy ," Page 32.

New York City Economic Development Corporation. " USMCA and Its Impacts on NYC's Economy ."

United States International Trade Commission. " U.S.-Mexico-Canada Trade Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors ," Page 43.

Northwestern Journal of International Law and Business. " Trade and Technology Within the Free Trade Zone: The Impact of the WTO Agreement, NAFTA, and Tax Treaties on the NAFTA Signatories ," Page 84.

Congressional Research Service. " The North American Free Trade Agreement (NAFTA) ," Page 27.

Congressional Research Service. " The United States-Mexico-Canada Agreement (USMCA) ," Page 11.

Northwestern Journal of International Law and Business. " Trade and Technology Within the Free Trade Zone: The Impact of the WTO Agreement, NAFTA, and Tax Treaties on the NAFTA Signatories ," Page 72.

ADB Institute. " Exploring the Trade-Urbanization Nexus in Developing Economies: Evidence and Implications " Pages 2, 7-13.

Brookings Institution. " Workers' Rights: Labor Standards and Global Trade ."

European Union Directorate-General for External Policies. " Addressing Developing Countries' Challenges in Free Trade Implementation ," Page 8.

World Trade Organization. " World Trade Report 2010: D. Trade Policies and Natural Resources ," Pages 126, 134, 136.

American University International Law Review. " Indigenous Peoples, Indigenous Farmers: NAFTA's Threat to Mexican Teosinte Farmers and What Can Be Done About It ," Page 1393.

Congressional Research Service. " The United States-Mexico-Canada Agreement (USMCA) ," Pages 1, 23-24.

Fair Trade Federation. " Fair Trade, Free Trade: Similar in Name Only ."

What Is Free Trade? Definition, Theories, Pros, and Cons

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• Supply & Demand
• Archaeology
• B.S., Texas A&M University

In the simplest of terms, free trade is the total absence of government policies restricting the import and export of goods and services. While economists have long argued that trade among nations is the key to maintaining a healthy global economy, few efforts to actually implement pure free-trade policies have ever succeeded. What exactly is free trade, and why do economists and the general public view it so differently?   

Key Takeaways: Free Trade

• Free trade is the unrestricted importing and exporting of goods and services between countries.
• The opposite of free trade is protectionism—a highly-restrictive trade policy intended to eliminate competition from other countries.
• Today, most industrialized nations take part in hybrid free trade agreements (FTAs), negotiated multinational pacts which allow for, but regulate tariffs, quotas, and other trade restrictions.  

Free Trade Definition

Free trade is a largely theoretical policy under which governments impose absolutely no tariffs, taxes, or duties on imports, or quotas on exports. In this sense, free trade is the opposite of protectionism , a defensive trade policy intended to eliminate the possibility of foreign competition.  

In reality, however, governments with generally free-trade policies still impose some measures to control imports and exports. Like the United States, most industrialized nations negotiate “ free trade agreements ,” or FTAs with other nations which determine the tariffs, duties, and subsidies the countries can impose on their imports and exports. For example, the North American Free Trade Agreement (NAFTA), between the United States, Canada, and Mexico is one of the best-known FTAs. Now common in international trade, FTA’s rarely result in pure, unrestricted free trade.

In 1948, the United States along with more than 100 other countries agreed to the General Agreement on Tariffs and Trade (GATT), a pact that reduced tariffs and other barriers to trade between the signatory countries. In 1995, GATT was replaced by the World Trade Organization (WTO). Today, 164 countries, accounting for 98% of all world trade belong to the WTO.

Despite their participation in FTAs and global trade organizations like the WTO, most governments still impose some protectionist-like trade restrictions such as tariffs and subsidies to protect local employment. For example, the so-called “ Chicken Tax ,” a 25% tariff on certain imported cars, light trucks, and vans imposed by President Lyndon Johnson in 1963 to protect U.S. automakers remains in effect today. 

Free Trade Theories

Since the days of the Ancient Greeks, economists have studied and debated the theories and effects of international trade policy. Do trade restrictions help or hurt the countries that impose them? And which trade policy, from strict protectionism to totally free trade is best for a given country? Through the years of debates over the benefits versus the costs of free trade policies to domestic industries, two predominant theories of free trade have emerged: mercantilism and comparative advantage.

Mercantilism

Mercantilism is the theory of maximizing revenue through exporting goods and services. The goal of mercantilism is a favorable balance of trade , in which the value of the goods a country exports exceeds the value of goods it imports. High tariffs on imported manufactured goods are a common characteristic of mercantilist policy. Advocates argue that mercantilist policy helps governments avoid trade deficits, in which expenditures for imports exceeds revenue from exports. For example, the United States, due to its elimination of mercantilist policies over time, has suffered a trade deficit since 1975. 

Dominant in Europe from the 16th to the 18th centuries, mercantilism often led to colonial expansion and wars. As a result, it quickly declined in popularity. Today, as multinational organizations such as the WTO work to reduce tariffs globally, free trade agreements and non-tariff trade restrictions are supplanting mercantilist theory.

Comparative Advantage

Comparative advantage holds that all countries will always benefit from cooperation and participation in free trade. Popularly attributed to English economist David Ricardo and his 1817 book “Principles of Political Economy and Taxation,” the law of comparative advantage refers to a country’s ability to produce goods and provide services at a lower cost than other countries. Comparative advantage shares many of the characteristics of globalization , the theory that worldwide openness in trade will improve the standard of living in all countries.

Comparative advantage is the opposite of absolute advantage—a country’s ability to produce more goods at a lower unit cost than other countries. Countries that can charge less for its goods than other countries and still make a profit are said to have an absolute advantage.

Pros and Cons of Free Trade

Would pure global free trade help or hurt the world? Here are a few issues to consider.

5 Advantages of Free Trade

• It stimulates economic growth: Even when limited restrictions like tariffs are applied, all countries involved tend to realize greater economic growth. For example, the Office of the US Trade Representative estimates that being a signatory of NAFTA (the North American Free Trade Agreement) increased the United States’ economic growth by 5% annually.
• It helps consumers: Trade restrictions like tariffs and quotas are implemented to protect local businesses and industries. When trade restrictions are removed, consumers tend to see lower prices because more products imported from countries with lower labor costs become available at the local level.
• It increases foreign investment: When not faced with trade restrictions, foreign investors tend to pour money into local businesses helping them expand and compete. In addition, many developing and isolated countries benefit from an influx of money from U.S. investors.
• It reduces government spending: Governments often subsidize local industries, like agriculture, for their loss of income due to export quotas. Once the quotas are lifted, the government’s tax revenues can be used for other purposes.
• It encourages technology transfer: In addition to human expertise, domestic businesses gain access to the latest technologies developed by their multinational partners.

5 Disadvantages of Free Trade

• It causes job loss through outsourcing: Tariffs tend to prevent job outsourcing by keeping product pricing at competitive levels. Free of tariffs, products imported from foreign countries with lower wages cost less. While this may be seemingly good for consumers, it makes it hard for local companies to compete, forcing them to reduce their workforce. Indeed, one of the main objections to NAFTA was that it outsourced American jobs to Mexico.
• It encourages theft of intellectual property: Many foreign governments, especially those in developing countries, often fail to take intellectual property rights seriously. Without the protection of patent laws , companies often have their innovations and new technologies stolen, forcing them to compete with lower-priced domestically-made fake products.
• It allows for poor working conditions:  Similarly, governments in developing countries rarely have laws to regulate and ensure safe and fair working conditions. Because free trade is partially dependent on a lack of government restrictions, women and children are often forced to work in factories doing heavy labor under grueling working conditions.
• It can harm the environment: Emerging countries have few, if any environmental protection laws. Since many free trade opportunities involve the exporting of natural resources like lumber or iron ore, clear-cutting of forests and un-reclaimed strip mining often decimate local environments.
• It reduces revenues: Due to the high level of competition spurred by unrestricted free trade, the businesses involved ultimately suffer reduced revenues. Smaller businesses in smaller countries are the most vulnerable to this effect.

In the final analysis, the goal of business is to realize a higher profit, while the goal of government is to protect its people. Neither unrestricted free trade nor total protectionism will accomplish both. A mixture of the two, as implemented by multinational free trade agreements, has evolved as the best solution.

Sources and Further Reference

• Baldwin, Robert E. " The Political Economy of U.S. Import Policy ," Cambridge: MIT Press, 1985
• Hugbauer, Gary C., and Kimberly A. Elliott. "Measuring the Costs of Protection in the United States." Institute for International Economics, 1994
• Irwin, Douglas A. "Free Trade Under Fire." Princeton University Press, 2005
• Mankiw, N. Gregory. " Economists Actually Agree on This: The Wisdom of Free Trade ." New York Times (April 24, 2015)
• Ricardo, David. " Principles of Political Economy and Taxation ." The Library of Economics and Liberty
• What Is Globalization?
• The Globalization of Capitalism
• Understanding the Pros and Cons of Protectionism
• The Protectionist Smoot-Hawley Tariff of 1930
• The Economic Effect of Tariffs
• Why Tariffs Are Preferable to Quotas
• History of the North American Free Trade Agreements
• Causes and Preconditions for the Industrial Revolution
• The Effect of the U.S. Dollar on Canada
• 5 Key Compromises of the Constitutional Convention
• The Arguments Against Free Trade
• Regionalism: Definition and Examples
• The Relationship of the United States with Mexico
• Rostow's Stages of Growth Development Model
• What Is an Embargo? Definition and Examples
• The History of Singapore's Economic Development

Negative Effects of Free Trade

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Carbon Tariff Economic Analysis

North american free trade agreement benefits, environmental and social impacts of free trade.

• Mckinley Tariff Act
• The Advantages of Free Trade in Developing Countries

Free trade is meant to eliminate unfair barriers to global commerce and raise the economy in developed and developing nations alike. But free trade can – and has – produced many negative effects, in particular deplorable working conditions, job loss, economic damage to some countries, and environmental damage globally. Yet, the World Trade Organization continues to advocate for free and unfettered trade, much to the detriment of some national economies and millions of workers.

Adverse Working Conditions

As underdeveloped countries attempt to cut costs to gain a price advantage, many workers in these countries face low pay, substandard working conditions and even forced and abusive child labor. In a "New York Times" article tellingly titled, "An Ugly Side of Free Trade: Sweatshops in Jordan," Steven Greenhouse and Michael Barbaro said that apparel manufacturing – "propelled by ... free trade" – was booming in Jordan and its exports to the U.S. had soared 20-fold in five years. Yet there is a dark side to this free trade, the paper stated:

"Some foreign workers in Jordanian factories that produce garments for Target, Wal-Mart and other American retailers are complaining of dismal conditions – of 20-hour days, of not being paid for months, and of being hit by supervisors and jailed when they complain."

Nevertheless, the WTO says it does not consider a manufacturer’s treatment of workers reason for countries to bar importation of that manufacturer's products. The WTO notes developing countries insist any attempt to include working conditions in trade agreements is meant to end their cost advantage in the world market. When this argument for free trade persists, workers globally pay the price.

Fears of Job Loss

Free trade agreements have also drawn protests from the U.S. public for decades due to feared job loss to foreign countries with cheaper labor. Yet proponents of free trade say new agreements improve the economy on all sides. The WTO acknowledges that free trade does indeed lead to job losses. At the 2017 World Economic Forum in Davos, Switzerland, Roberto Azevêdo, the WTO's director-general stated:

"Trade is responsible for two job losses out of ten. What happens is the other eight are lost not because of trade but they are lost because of new technologies, innovation, higher productivity."

Though Azevêdo was arguing that other factors account for 80 percent of job losses globally, it's notable that the director of the world's greatest advocate for free trade was acknowledging that 20 percent of all job losses on the planet are caused by free trade. That would certainly be a strong argument against free trade, not for it. And, New York Times columnist Paul Krugman argues that free trade deals with countries like Korea and Colombia aren’t “job creation measures.” This is hardly a ringing tribute to free trade.

"Great Sucking Sound"

During the 1992 presidential election, Ross Perot warned that the then-new North American Free Trade Agreement (NAFTA) between the United States, Mexico, and Canada would create a "great sucking sound" as millions of jobs were siphoned out of the U.S. and into Mexico and Canada. And, it looks like Perot was 100 percent correct, notes "Business Insider" stating:

"The goods balance of trade for the U.S. with Mexico has been negative and steadily growing over the years. In 2010 it amounted to $61.6 billion, which was 9.5% of the total goods trade deficit (in 2009). "

Unions, understandably, have strongly criticized the free-trade agreement as critically harmful to workers and the U.S. economy. The AFL-CIO argues that NAFTA has harmed consumers and workers in all three countries, contributing to a loss of jobs and drop in income while strengthening the clout of multinational corporations. The unions contend that the increased capital mobility facilitated by free trade has hurt the environment and weakened government regulation.

Changes Under the Trump Administration

Then-candidate Donald Trump promised during his campaign to end United States participation in NAFTA. As President, Trump has negotiated a new three-county pact to replace NAFTA and announced, in October 2018, that NAFTA would be superceded by USMCA – the US-Mexico-Canada Agreement. It remains to be seen how effective this new agreement will be in softening some of impacts of unfettered free trade.

Effects on the Environment

Others agree that the environment is another casualty of free trade. Put simply, you can't have free trade and "save the planet," says Alf Hornborg, a professor of human ecology at Lund University in Lund, Sweden, noting:

"For centuries world trade has increased not only environmental degradation but also global inequality. The expanding ecological footprints of affluent people are unjust as well as unsustainable. The concepts developed in wealthier nations to celebrate 'growth' and 'progress' obscure the net transfers of labor time and natural resources between richer and poorer parts of the world."

Lund echoes the arguments discussed previously: that free trade causes global inequalities, poor working conditions in many developing nations, job loss, and economic imbalance. But, free trade also leads to a "net transfers of labor time and natural resources between richer and poorer parts of the world," he says. Free trade is driving the growing global problem of greenhouse gases, because workers in developing nations end up producing goods at a far lower cost and in inferior working conditions, generally using older, and dirtier, energy sources such as oil and coal, Hornborg argues. This occurs while the economies globally consume more of the diminishing natural resources on the planet, and fail to develop clean fuel technology, such as solar and wind power.

Putting all of these factors together – job loss, economic imbalance, deplorable working conditions, and environmental degradation – and free trade falls on the negative side of any economic equation: It's bad for job growth, bad for working conditions, bad for global equality, and bad for the environment.

• WTO: Trade and Labour Standards
• Encyclopedia of Earth: Environmental Impacts of Trade
• New York Times: Things Free Trade Doesn’t Do
• CNBC: WTO admits global trade deals 'are never perfect for anyone'
• New York Times: An Ugly Side of Free Trade: Sweatshops in Jordan
• The Guardian: Unions oppose free trade deal 20 years after losing battle to stop Nafta
• The Conversation: Why You Can’t Have Free Trade and Save the Plane
• CNN: What's new in the US, Canada and Mexico trade deal?

Leon Teeboom has written for such newspapers as "The Los Angeles Times" and "The Orange County Register." He has also written for/and worked as an editor at "The Press-Enterprise" as well as two business publications and several online media companies.

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What are the main advantages and disadvantages of global free trade? Does it exist in practice?

Essay, 2001, 10 pages, grade: ects-grade: b = 2, anne uhlhaas (author).

Abstract or Introduction

The posed question comprises three different issues which have to be investigated. The first thing, implied in this question is, whether or not there are more arguments for or against global free trade both in theory and in practice. Secondly, we have to ask, if real global free trade is being practised in our times. The third issue deals with the question of how we should go on in the future. Is global free trade worth being expanded or should we better tend to protectionism? In this essay I will argue that although free trade is said to cause some unintentional side-effects it is a better way of achieving economic and social development than protectionism. Most of the problems concerning free trade only exist due to the fact, that protectionist barriers set up by Northern countries still disturb a real free trade system and therefore constitute a disadvantage for developing countries. I first want to work out the opportunities and benefits but also the challenges and problems of global free trade, as they are seen in our times. I will refer to the question of gains and losses for both, industrialised and developing countries. Firstly, I want to look at economic effects and will then turn to political and environmental issues and to the linking of the recent terror attacks with free trade. I will then ask the question how free trade is being practised today. Finally, I will sum up my results and will conclude with answering the question whether free trade is worth a greater expansion in the future or not.

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The hidden cost of free trade

Trade liberalisation creates gains from trade in 45 countries, and losses in the remaining nine. Image:  Unsplash/Chuttersnap

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Guido porto, bob rijkers.

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Stay up to date:, trade and investment.

Questions about who benefits from free trade – and at what cost – have resurfaced as part of the backlash against globalisation. This column uses data from 54 low- and middle-income countries to show that in a majority of cases, trade liberalisation increases both incomes and inequality. Most of these trade-offs resolve in favour of liberalisation; despite exacerbating income disparities, trade liberalisation creates overall social welfare gains.

The recent backlash against globalisation and a resurgence of protectionist tendencies have renewed interest in the distributional impacts of trade policy (Baldwin et al. 2017, Fajgelbaum et al. 2019). In developed and developing countries alike, trade liberalisation has left large swaths of the population jobless (Autor et al. 2013, Kovak 2013), despite boosting growth and innovation (Coelli et al. 2016). Moreover, trade is often alleged to exacerbate inequality. Should free trade be opposed on inequality grounds?

In a new paper (Artuc et al. 2019a), we answer this question by providing estimates of income gains and inequality costs resulting from unilateral import tariff liberalisation for 54 low- and middle-income developing countries. Inequality considerations are especially important in these countries given that substantial shares of their populations either live in poverty or are at the brink of falling into it. Whether a trade-off exists between the income gains and inequality costs of import tariff liberalisation is thus a crucial question.

How much each household in a given country gains or loses after trade liberalisation depends on how much tariff cuts reduce prices, and how these price changes impact different households. As consumers, households benefit from lower prices; but as income earners, lower prices imply lower profits and wages. Because households consume different types of goods and have different income portfolios, trade impacts are likely to vary across the income distribution. Poor households, for instance, tend to spend a larger share of their income on food products than do rich households, and derive a lower share of their income from wages.

Painstakingly harmonising household survey data with trade data allows us to quantify, to first order, how each household is affected by liberalisation-induced changes in the prices of a disaggregated and representative set of goods.

Have you read?

Why trade liberalisation benefits smaller countries more, how trade liberalisation affects unemployment and real income, what is the relationship between free trade and economic volatility.

The evidence for income gains from trade is overwhelming: Trade liberalisation creates gains from trade in 45 countries, and losses in the remaining nine. The losses arise from governments losing tariff revenue. Average income gains across all countries are 1.9% of real household expenditure on average, driven to a large extent by lower food prices.

Yet, these gains come at the expense of exacerbated inequality. In 37 countries, the top 20% of the richest households would gain more from liberalisation than the bottom 20%. Examples include Benin and Uzbekistan, where rich households gain more than poor, as shown in Figure 1, which depicts average income gains against log per capita expenditure in the status quo. In Uzbekistan, households throughout the income distribution gain on average, but rich households gain more than poor. In Benin, poor households lose real income while rich households gain. In 17 countries, liberalisation would reduce inequality; in the Central African Republic, for instance, liberalisation disproportionately benefits the poor.

We then assess how estimates of the gains from trade change once we take into consideration impacts on inequality, allowing for different views on how inequality-averse one should be. Trade-offs arise when income gains are accompanied by increased income inequality.

In a handful of countries, there are no trade-offs; trade both improves incomes and reduces inequality (or leads to both a reduction in income and worsening inequality). In the Central African Republic, for example, the gains from trade are amplified depending on the magnitude of amplification increasing with inequality aversion.

In the overwhelming majority of countries, trade-offs arise. In Uzbekistan, for example, trade improves incomes but worsens inequality. Factoring in the impact on inequality reduces the inequality-adjusted gains from trade, but they never turn negative; liberalisation would be associated with higher welfare. This is not the case for Benin. When inequality aversion is low, liberalisation is preferred; when people care a lot about inequality, the status quo yields higher levels of social welfare. Put simply, whether liberalisation is desirable depends on how much one cares about inequality. Across countries, the majority of trade-offs resolve in favour of liberalisation; even though trade exacerbates income disparities, it brings social welfare gains.

Figure 1 The distribution of the gains from trade

A2 Uzbekistan

A3 Central African Republic

These results underscore important heterogeneity in the impact of trade policy, both across countries and within countries across households. Not everyone gains from trade, and some households lose significantly. The results also pose a puzzle, for they suggest that countries would be better-off if they were to liberalise. Yet, they choose to implement trade protections instead. Understanding why is an important topic for future research.

Authors’ note: In an accompanying paper (Artuc et al. 2019b), we introduce a simulation toolkit to calculate changes in income distribution of households following specific tariff shocks that can be entered with a user-friendly web interface. The toolkit and underlying data are available at https://www.worldbank.org/en/research/brief/hit .

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The Benefits and Disadvantages of Free Trade Analytical Essay

State of the global economy, advantages of free trade, disadvantages of free trade, tradeoffs of integration.

The World Trade Organization is the sole global body that deals with fairness in trade among nations. It designs rules to ensure that large economies and small economies are at par in economic growth. However, its policies and propositions are not popular with most nations.

Its aims are to facilitate demand and supply by ensuring that producers of goods and services find a way to export their products and those that do not produce find a way to import what they need. Through its membership, World Trade Organization facilitates two major world forums. The Doha Development Agenda is a trade negotiations forum.

It is designed to achieve groundbreaking reforms in the manner in which world economies conduct their trade. The forum’s agenda is to inject revised rules and to improve the international trade system through systematic introduction of minimal trade restrictions. It was officially launched in Qatar in 2001. Ministers of respective countries tasked with commerce, trade, and sometimes finance attend the forum.

Each minister goes to the table to air their countries’ views. The Doha development agenda covers around 20 critical areas of world economy, which include agriculture, services, imports, exports, intellectual property, among others.

World Trade Organization’s advocacy for free global trade has not been popular with majority of the nations. Although free trade has many benefits as opposed to closed trade, many countries perceive free trade negatively and bring down any attempts at making the world economy free of national and regional barriers.

For example, in 2003 during the talks that were held in Caucun Mexico, the world witnessed massive protests. This was the third ministerial meeting with the same agenda: trying to break the deadlock that had been experienced in the last two sittings since the first round in Qatar.

The second major forum facilitated by World Trade Organization is the World Trade Forum. This forum seeks common ground on how countries can work together in tackling common global problems that go beyond the need for economic integration. This includes the need for development in major areas such as education. Major economies and their leaders normally attend it.

They review goals and targets such as millennium development goals. This forum is generalist compared to the Doha round of negotiations. However, it is important to note that they both champion for a more developed world, which caters for the need of everyone. The following principles guide WTO.

Principle of Non-Discrimination: It requires a WTO member to apply similar trade conditions while transacting with all WTO members. It simply implies that the WTO members should treat other in a favorable manner. In addition, if a favor is extended to one member of the WTO in a certain transaction, similar treatment should happen to any other WTO member in case of a similar transaction.

Reciprocity: This principle advocates for nations to do mutual things to each other. For example, reduction of transaction tariffs should be mutual and equal in measure. Markets should be freer on both sides of the spectrum. Barriers restricting such trade should effectively come down to enable more trading for mutual growth and benefits.

Predictability: World Trade Organization proposes that any agreements arrived at should be binding and long-term. Any member should not decide arbitrarily to change any terms or conditions.

This gives confidence to members, investors, governments and any other stakeholders. It is a good ingredient to promoting healthier relations and growing economies. The subjects that touch on this principle include market-opening commitments, tariff rates, and trade barriers.

Beneficial to Less Developed Countries: This is a critical principle. However, in recent times and in the past many developed countries have misused this principle. It proposes that underdeveloped countries should enjoy special privileges when dealing with economically strong economies.

This will enable them to enjoy greater visibility and flexibility in the marketplace. At the start of the supposed agreement, it helps these economies to adjust to the current economic environment. Adjustments include sensitization of its citizens and structural changes, which may be much easier for the big economies.

Competitive and Fair: The WTO strongly advises that a fair and level playing field should exist for all nations. Every country should fairly compete and universal human standards upheld. It discourages unorthodox practices such as arbitrary dumping of obsolete products to third world countries.

This practice common among the developed countries is inhumane and self-seeking. It also goes against United Nations Charter. Others include unfair export subsidies and cheap products development to gain market share.

If free trade is beneficial to nations, why does it face such hostility? Why is it that since its formulation in 2001, Doha round of negotiations did not record any milestones until 2011? Does it mean that since the major economies had been experiencing massive growth in their economies before 2011, they did not find it necessary to include other nations in their trade? These pertinent questions depict large economies as greedy.

They also point out the greatest lacuna in these talks where majority of the nations with the vote are large economies that want to shelve the interests of others.

This paper will analyze the benefits and disadvantages of free trade and look into the reasons why efforts geared towards this are hampered. Additionally, this paper will critically analyze the state of the global economy and reasons for the current state in light of existence of an idealistic free trade among nations.

Since the World War 2, political disintegration has been on the rise. There is currently more than three times the number of independent countries than there were at the end of the war. Political disintegration has sometimes been credited with innovation as countries strive to come up with ways to fund budgets, increase security, and be relevant to its citizens.

Consequentially, political disintegration has led to economic disintegration. Although some economists argue that this leads to innovation in respective countries, as noted above, majority are of the opinion that integration of fiscal, economic, and monetary policies that are geared towards the benefit of all nations have far-reaching benefits than the former.

The global economy can be classified as irregular clusters of self-seeking political and economic integrations, which offer minimal, if any, benefits to the less performing economies. The political and economic integration of Euro Zone is a perfect example. These countries have curtailed sovereign fiscal policymaking and delegated that to the European Union.

In future, this was expected to continue until the recent Euro Zone crisis that was brought about by reckless borrowing by some members. There is minimal economic integration world over since most large economies are interested in vesting their interests at the expense of smaller economies. This brings a wedge of sharp mistrust and spawns half-baked integration with minimal benefits.

Examples of treaties that may not be effective include NAFTA, COMESA, EAC, among others. The fact that countries can easily pull out of these economic bodies reduces their credibility and waters down their efforts. Hence, the world economy is closely guarded with minimal freedom to conduct trade.

Additionally, there is minimal fairness in the game with countries that can produce goods cheaply illegally exporting these products to countries that produce them at a higher cost. This essentially kills trade.

Since the financial crisis started in the United States and quickly spread in other nations, many countries have restrained their need to import in an effort to appear to support their ailing economies. This was particularly informed by falling employment levels in many countries. Many lobbyists would criticize government if it imported any goods or services that could be produced locally.

This forestalled growth in free trade and countries continue to be wary. For example, in South Wales, when the government imported police uniforms and firefighters gears from an Australian firm, there was mass ridicule from lobbyists and citizens.

This has been the case in United States, Europe and a host of other countries. Hence, these efforts to concentrate on growing national economies and protecting them have led to the traditional artificial barriers that restrict free trade.

Free trade may not be a fair trade but it has many benefits. Governments erect restrictions that restrict movement of goods and services between countries. Governments do this through use of subsidies and tariffs to hamper free trade. Normally, this is aimed at protecting domestic production from international competition. However, free trade has its benefits.

First, it allows countries to specialize in production of goods and services that they have comparative advantage. This specialization brings about efficiency, economies of scale, and increases output, which results in increased production. Second, free trade leads to an increase in productivity and a higher domestic output by increasing efficiency of resource allocation.

In addition, it increases competition, which leads to innovative ways of distribution, marketing, and technology. Third, the increased competition allows goods and services to trade at the lowest costs and gives producers reason to produce quality. Hence, customers experience quality. It also allows customers to have a variety of goods and services.

Fourth, free trade results in foreign exchange gains associated with the exchange of hard currency. This exchange allows the domestic country to pay for imports without having to exchange the money, which can be costly at times. Lastly, introduction of free trade generates employment to the domestic population.

This is because it allows economic resources to be shifted to the more productive areas of the economy, which leads to more demand for exports. The resultant effect of free trade is economic growth and development. Higher incomes and higher growth rate in economy increases living standards of citizens. Domestic industries increase production levels and enhance efficiency in productivity.

Although there are many advantages, many disadvantages are put forth by conservative governments, lobby groups, and some economists to scuttle the efforts towards a free trade. First, free trade creates a domestic dependence on global markets. This creates a domestic economic instability associated with inability to control majority of the markets and prevailing forces such as demand, wars, and recessions.

Second, the global market does not offer a level playing field. A country may produce a certain commodity cheaply at a surplus and, to avoid losses, dump it in a country that produced the same commodity at a higher cost. Many countries find it hard to compete when such conditions prevail. Additionally, the nature of goods a country produces may not auger well in trying to find a favorable balance of trade.

For example, countries that produce agricultural related commodities experience unfavorable terms of trade. This results in lower export income and subsequently a large national debt. Third, it is in the interest of nations to protect their upcoming industries. This may not be possible if they are constantly facing competition from already established firms.

Hence, developing economies may find it more conducive to close trade and allow growth of its industries. Lastly, there are other disadvantages such as protection from environmental pollution by external firms and protection from a possibility of structural unemployment.

Introductory Case

The European Union is the single biggest economic and political integration since the Soviet Union. Europe had embraced industrial revolution and there was high industrial development across the region prior to the World War II. The war brought the economy of Europe into waste, with many of its industries destroyed.

During the period of 1945-1990, many of the countries in Eastern Europe fell into the communist hands of the USSR. United States came in sought to help save the European economy under the Marshall plan; it aided the western part of Europe and helped in building the economy.

By the 1980s the communist nations were rapidly falling while the economies of Western European countries were increasingly gaining power, this is attributable to the support of the USA.

With the help of America, many of the western nations moved to link together through economic integration. They formed the European Union that increased trade among them through shared infrastructure.

They agreed on a common currency (the euro) and made trade agreements that set their economies on the path to recovery. This was unlike the Soviet Union, which had wanted to continue scuttling efforts of recovery in Europe to its advantage.

Britain had been weakened by the Second World War hence it could no longer support countries in Europe like Greece and Turkey. It thus sought the intervention of the United States. The united states were strongly opposed to communism and to avoid European economies from falling in the hands of the soviet union they provided financial aid and also played a major role in stabilizing the civil wars at the time.

America’s intervention through the Truman doctrine saved the nations from soviet communisms in effect saving Europe from foreign policy failures and military humiliation. America believed that once a country falls into communism it would also weaken the neighbors as there would be minimum interaction due to diverging trade systems.

Their support was evident when the Soviet Union pressured Turkey over the Dardanelles Strait concessions that would have allowed invasion from the west, through enunciation of the Truman policy. USA helped Berlin with supplies and food when Stalin attempted to barricade West Berlin in a bid to take control.

This enabled Europe to maintain control of its cities from the Soviet Union. Were it not for the vast amount of aid America gave to Europe, European economies would have fallen further with the Soviet Union invasion during the cold war.

There are two types of integration: economic and political integration. The above case highlights the tricky nature of political and economic integration especially when carried out at the same time. The European Union is a classic case of economic integration with a measured political integration.

For example, it is possible to travel from some countries to others without a visa and it is a legal requirement is some countries within the euro zone. Economic integration is a major challenge to the national fiscal policies, the existence of some economies without straining and the entry of new members in the euro zone. These challenges are highlighted below.

Social and Political Challenges

A close look at Portugal and Spain who were late entrants into the European Union depicts profound developments in those two countries. Since entering euro zone, Spain has recorded a favorable economic climate highlighted by increased trade within Europe, access to European budget, and favorable infrastructure. However, many pundits believe that the inclusion of Spain and Portugal was not purely for economic reasons.

The European community strives to ensure that they have a functioning democratic union, with a common military purpose and a common defensive approach. Some economists argue that there cannot be a functioning economic integration without a political integration of some kind.

This is because many economic policies are spawned from political decisions. Hence, it follows that many Euro Zone countries do not have the political free will to make decisions as others may have.

The attached cartoon depicts a situation where a policymaker is considering two extreme options. The government of Greece had been borrowing money from the European Union members and from its citizens to fund expenditure budgets. It reached a point where the government was unable to meet its obligations and this resulted in a budget and debt crisis. The options were quite limited for the Greece government.

This is because they were not allowed to make hard financial decisions independently. Hence, the extreme options were to pull out of the Euro Zone and renege on debt payments to Germany and other big lenders or to abide by the demand from Euro Zone members to cut budgetary spending in exchange for a bailout agreement.

The bailout agreement, too, had many obligations. This includes the need to curtail government spending. This means the government will have to cut loose a massive working population from its structure. The other option will be to tax the Greek nationals more to meet the required budgetary requirements.

If Greece were independent from Euro Zone, the options would have been limitless. For example, the country’s central bank would have devalued the country’s currency. This would have facilitated more foreign investments and shored up the balance of exchange. Additionally, more money in circulation would have increased peoples spending and hence spurred economic growth.

However, all these fiscal decisions are tied to the Euro Zone fiscal structure. It is imperative to note that Greece was considering pulling out of euro zone. This meant that it would treat Euro Zone members as any other country outside euro zone. The reason this was an attractive way out is the short-term benefits.

For example, the country would immediately cease from having to consider Euro Zone members in its imports before going for any other option. Hence, the country would import essential commodities cheaply from countries in Asia, Africa, and Americas. Additionally, the country’s fiscal policies would be independent of any rules and regulations.

However, Greece would face trade barriers from even the closest neighbor and its exports would face a major lag. Hence, it would be hard to continue exporting goods to immediate neighbors. Additionally, it would be hard for Greece to be reaccepted into euro zone. The other countries will build a lasting mistrust in Greece. All these would have political, social, and economic consequences on Greece.

Legal Consequences

A country that enters into an economic integration has to abide by the rules of the integration. In the case of euro zone, all countries are required to align their agricultural, economic, and industrial legislation with the requirements laid down. Additionally, financial policies of a country must be in line with the European community. It is also mandatory to have certain taxation regimes and to have certain tariffs and subsidies.

Additionally, a country aligns its budgetary requirements with those of other countries in the euro zone. A country is also restricted from conducting business with another country if it can conduct that business with a country in the European community. All these are legal consequences that come with integration elsewhere.

One of the reasons why trade integration treaties do not work is because most countries do not take the integration seriously. In addition, the structures in place to ensure that these rules are adhered to watered down by the fact that a country has the free will to pull out at any time.

Poor Members

Poor members are one of the major reasons why economic integration is hard. Poor members feel like they are alienated and are not enjoying similar benefits as the rest. This had threatened the very existence of Euro Zone in the 1980s. These disparities include par capita income, infrastructure developments, education levels, productivity, and employment.

All these led to trade imbalances and hence poor countries were feeling the brunt. Efforts were made to harmonize this and some years later a fund specifically designed to address these problems was set up.

These structural policies systematically advocated introduction of new provisions that would make social and economic cohesions a common goal. Most integration treaties do not go to that extent. This means that in the end, most poor countries that are hungry for domestic development pull out. Eventually, the ability of the integration to continue working is severely scuttled.

From the above analysis, it is evident that a country that enters into an agreement with other countries significantly reduces its sovereignty. Depending on the nature and level of integration, a country may also enjoy a number of benefits.

Hence, a country trades off by weighing the option of giving up certain privileges to gain some advantages. The treaty has to be formed with good intentions. Failure to do that may result in its immediate crumble. For example, an effort should be made to ensure there is fairness that caters for the poor countries so that all enjoy fruits of integration.

• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2023, December 26). The Benefits and Disadvantages of Free Trade. https://ivypanda.com/essays/the-world-trade-organization-2/

"The Benefits and Disadvantages of Free Trade." IvyPanda , 26 Dec. 2023, ivypanda.com/essays/the-world-trade-organization-2/.

IvyPanda . (2023) 'The Benefits and Disadvantages of Free Trade'. 26 December.

IvyPanda . 2023. "The Benefits and Disadvantages of Free Trade." December 26, 2023. https://ivypanda.com/essays/the-world-trade-organization-2/.

1. IvyPanda . "The Benefits and Disadvantages of Free Trade." December 26, 2023. https://ivypanda.com/essays/the-world-trade-organization-2/.

Bibliography

IvyPanda . "The Benefits and Disadvantages of Free Trade." December 26, 2023. https://ivypanda.com/essays/the-world-trade-organization-2/.

• WTO: Serving the Wealthy, Not the Poor
• The World Trade Organization (WTO)
• Origin, Purpose and Important Aspects of the WTO
• Relationship Between WTO and the Regional Trade Organizations
• Greece and Euro Zone
• WTO’s Role of Ensuring Smooth, Predictable and Free Flow of Trade
• The Fate of the Euro
• Euro Zone Crisis: Does It Contribute to Democratic Deficit?
• Countries Leaving European Union
• Economic Crisis in Greece
• Laws and Regulations for Business Transactions in Canada and Brazil
• Policy Mechanisms for Trade Reform in a Democracy
• State Power and Economic Crisis
• International Trade as a Significant Issue in International Political Economy
• Global Warming Impact on International Business: Apple and HP

19 Advantages and Disadvantages of Free Trade

Free trade occurs when there are agreements between two or more countries to reduce barriers to the import and export markets. These treaties usually involve a mutual reduction in duties, taxes, and tariffs so that the economies of every country can benefit from the various trading opportunities. One of the most well-known examples of this approach is the USMC Agreement, which replaces NAFTA to govern free trade across North America.

Free trade agreements allow a country to have access to more markets throughout the world. It can encourage local industries to improve their competition while relying less on subsidies from the government. It is a process that can lead to the opening of new markets, and improvement in GDP figures, and new investment opportunities.

When free trade involves a developed country and one that has yet to fully industrialize, then there can be an exploitation of natural resources that occurs. Some households might see the traditional livelihood fade away for modern jobs. It can even cause problems in the domestic employment sector for all involved parties.

The advantages and disadvantages of free trade show us that any nation deciding to enter into an agreement must take proactive steps to guard their resources and people against exploitation without resorting to protectionism.

List of the Advantages of Free Trade

1. Free trade creates economic growth opportunities. The free trade agreements in North America helped the U.S. economy grow by an average of 0.5% per year more than it would have otherwise. When countries can freely move products across borders, then each nation gets to take advantage of the manufacturing, commercial, and industrial strengths of every other economy in the agreement. That means there are lower cost burdens to worry about with each transaction, prices stay lower, and there can be healthy competition in the market.

2. There are more opportunities for foreign direct investment. When nations remove the barriers that are in place for free trade, then more companies are willing to invest in other countries. There are new investments, partnerships, and opportunities that develop because of this approach in markets of any size. That means you can focus on creating deeper, more fulfilling relationships with other governments who share the same perspective of the world today. Countries with shared borders can promote a better standard of living because it is harder to go to war with someone who is your economic partner.

Between 1994-2019, the policies of free trade allowed for an average of $25.6 billion in foreign direct investment to support the American economy each year. The second quarter of 2018 saw a record of $55.83 billion in that three-month period alone.

3. It lowers the taxes that consumers and businesses pay. The inclusion of tax and investment protection in free trade agreements make it possible to guard the interests of local business owners more efficiently. When these safeguards disappear, then the result tends to favor the consumer because more competition from global agencies can happen at the level of consumption.

This advantage reduces stagnation within markets, though at the risk of eliminating smaller businesses from the equation. Lower assessments and fewer restrictions to entry can also reduce pricing for customers.

4. Fewer government expenditures occur because of free trade. Several domestic industries receive financial benefits from the government, including farming and other areas of agriculture. This money goes from the taxpayer to the producer as a way to counter the impact that tariffs have on the import and export markets.

By injecting new best practices and creating new competencies into the domestic delivery systems, less government money is necessary to keep prices affordable at the local level. This advantage means that the tax revenues can go toward infrastructure needs, social programs, defense, or other community requirements without keeping unprofitable business ventures afloat.

5. It creates better goods. When free trade occurs, then each market receives more access to higher-quality goods at lower prices. Cheaper imports help to ease the pressure of inflation in the United States because of the American relationships with China and Mexico. Prices are held down by over 2% for every 1% share in the market of imports that come from countries with a lower income level. That means the average U.S. household has more money to spend on other products. The requirement of innovation here means that businesses are constantly finding ways to solve problems for consumers.

6. Free trade involves more than just consumer goods. At least 50% of the imports to the United States each year are not consumer goods. They are inputs for producers who are based in the U.S. so that domestic production costs can go down. This advantage also promotes economic growth because it diversifies the supply chain for an organization of any size. Even micro-businesses, freelancers, and gig specialists can benefit from this advantage because the Internet provides immediate access to cheaper goods, new research, and service expansion opportunities.

7. It helps the people who have the least amount of money to spend. Some people believe that more wealth can only come when a country can export more of its goods or services to other nations. The economic reality of free trade is that it is the total level of imports and exports that accurately reflects prosperity. When the people at the lower tier of the national income levels have more money to spend, then the entire economy benefits. That’s why the removal of tariffs is such an integral part of this process.

Cheap sneakers that come from China might have an import as high as 60% some years in the United States. If you were to purchase a part of Italian leather dress shoes, the tariff might be less than 9%. Regular drinking glasses have a tariff of almost 30%, but crystal glasses have one at 3%. When more Americans can buy cheap imports, then it encourages non-Americans to invest more in the country.

8. Free trade creates more opportunities to solicit workers with expertise. Automakers sent jobs to Mexico because of NAFTA, and then decided to import the vehicles back to the United States because of the favorable tariff policies. Although this issue took some jobs from American laborers, it also gave companies the chance to find workers from almost anywhere in the world with the right levels of expertise. By looking to foreign markets for this help, the costs stay down for the manufacturing process to maintain pricing at competitive levels.

This advantage also means that multiple economies around the world can benefit from this approach. It is one of the reasons why India has one of the fastest-growing Middle Class sectors in the world today.

9. Experts get to have access to the most resources with free trade. Free trade agreements attempt to put the most opportunities into the hands of the people who can create successful outcomes. There are no border restrictions to this advantage. That’s why anyone can become whatever they want to be in life if they have access to an economy built on this principle. The amount of competition that becomes available is the primary driver of what local populations think is possible. Anyone can become what they want to be in life if they work hard enough to reach their goals thanks to the fewer economic restrictions that exist with this opportunity.

List of the Disadvantages of Free Trade

1. Free trade does not create more jobs. It is a myth to say that free trade encourages employers to send their jobs overseas. It would also be incorrect to say that the increase in competition would create more employment opportunities. It reduces the number of opportunities that are available in inefficient industries. The positions that do remain will see a boost to their overall wages and an improvement to the standard of living, but it doesn’t ship the unwanted jobs overseas. It eliminates the policy of saving a job at any cost, even if opportunities are shrinking in that industry.

Free trade is responsible for 20% of the job losses that occur in the world today. When these agreements are made with highly capable countries or those with relatively few products, then there might be zero job creation measures that develop over time.

2. It encourages more urbanization. When you look at a map of the United States, you will find an interesting trend. The households who live in urban areas typically lean to the political left, while those in the rural regions vote more toward the right. Free trade encourages families to move away from agricultural work because it is more efficient to let factory farms take care of the food supply. That means more people move into the cities, encouraging urbanization so that there isn’t any money saved from the efforts to keep trading lanes open.

3. There are more risks for currency manipulation. When China allegedly made an effort to devalue its currency in response to U.S. tariff demands, the stock market had its worst day in 2019. Then the reality of the situation set in for investors. Lower yuan values make Chinese goods cheaper for American consumers. It counters the process of a tariff by creating lower prices through monetary policy. That also means Chinese consumers purchasing American goods must pay more for their items. When this disadvantage is considered, then one set of consumers always win and the other always lose. Free trade attempts to regulate this process, but the agreements cannot account for unanticipated manipulation that occurs outside of the system.

4. There can be fewer intellectual property protections because of free trade. IP rights are not always taken as seriously by international governments or business rivals as they are in a firm’s home nation. Patents, processes, and other inventions, including branding, graphic displays, and imaging, are sometimes copied in the free trade environment. This disadvantage lessens a company’s opportunities to bring new jobs at the local level while providing reasonable wages.

Even when there are IP rights protections in place because of a free trade agreement, there are guarantees that foreign governments will enforce the laws with the same rigor as the local government.

5. The developing world doesn’t always have worker safeguards in place. Developing countries and emerging markets rarely have the same laws in place that protect employee wages or the conditions in the workplace. Some nations even permit the hiring of children for factory jobs or heavy labor needs that place them in dangerous, sub-standard conditions. Some workers in Jordan that produce clothing for American retailers might work 20-hour days, not receive a paycheck for months, and then face jail time or physical abuse from supervisors if they complain.

The reason for this disadvantage involves the competition requirement for free trade. The goal is to create an overall lack of restrictions so that consumers can watch their spending. That means compromises are possible, promoting poor working conditions that workers must endure if they want to continue earning a living for their family.

6. Environmental protections are minimal in free trade. Free trade agreements rarely protect the environment. The goal for businesses in developed nations is to exploit the natural resources in other regions where restrictions or regulations may not be as stringent. Then the fastest, cheapest methods of creating goods or performing services becomes the point of emphasis. Strip mining, clearcut logging, and other problematic behaviors can increase global emissions, even though the activities might not count on their domestic scoreboard.

The developing world often sells short-term gains for long-term problems. Money from the natural resource trading can fund government operations or encourage corruption, allowing the wealthy to benefit while the working poor struggles to survive. Unless new industries develop, the money from this initial investment will eventually disappear.

7. There can be fewer revenue generation opportunities in free trade. Higher competition levels can create lower revenue potential in the industries impacted by free trade the most. Some firms, such as Walmart, are large enough to operate on a massive scale so that they can avoid this disadvantage. Those razor-thin margins make it a challenge for small business owners to provide meaningful services.

This disadvantage even applies to the gig economy. When a service provider in the United States charges $30 for a service, someone in a developing country might get the same value from a $5 purchase. That cost difference makes it impossible for the one provider to stay competitive if the quality of services is equal.

8. It can stiffen international competition for domestic economies. Free trade agreements only guarantee that there are gains that occur because of enhanced activities in the import and export markets. There is no way to determine who will benefit the most from an arrangement with few, if any restrictions. Rising productivity in foreign countries might cause induced changes to grow, which means the international competition in some industries can put additional pressure on the overall market. Because free trade doesn’t assign specific industries to any particular country, there is no way to determine in advance if a positive outcome is possible.

9. Customers are left at the mercy of the largest providers. When companies grow larger, then they can accrue more money. When there is additional wealth available to an agency, then there is enough influence available to start shaping economic policies. Large multinational firms have the power to offer lower prices, but many of them choose not to do so because there is no need for that action to occur. Customers are forced into an economy of scale, purchasing items from an oligarchy where price controls may be non-existent. That means your personal access to affordable goods is entirely reliant on the generosity of the C-Suites of each agency for every industry.

10. There can be opportunities for immigration outsourcing. When NAFTA first came about, the free trade agreement made it easier for people in North America to travel or immigrate to all three countries. If you had a specific skill set that was in demand, then your living situation could be expedited. The current version of the USMCA allows for this to some extent as well. Companies don’t always outsource jobs, but people can outsource themselves because of the loosening of population movement restrictions in a free market.

Verdict of the Advantages and Disadvantages of Free Trade

Free trade gives countries of any size an opportunity to create new economic opportunities for themselves. It is a way to increase choice at the domestic level, control costs, and encourage innovation in the targeted industries and commercial sectors.

When there are fewer tariffs in place, then the government will lose funds that it might have already budgeted in previous years. There can also be regulatory problems that occur as global businesses attempt to get a piece of the pie.

The overall advantages and disadvantages of free trade show that when multiple countries can work together to create mutual benefits, then the global economy can gain strength. That is why trade wars can be such a devastating problem too. Domestic consumption can only take a company so far.

15 Advantages and Disadvantages of Free Trade Policy in Economics

Free trade agreements are treaties which regulated the duties, taxes, and tariffs which countries impose on the imports they receive or exports that are sent. Numerous treaties exist which follow this process, with one of the most lucrative being the North American Free Trade Agreement that was recently renegotiated to become the United States, Canada, and Mexico Agreement.

When such an agreement is in place between 2+ countries, then they are able to move goods and services with more freedom across borders. This structure creates economic opportunities for all the parties involved, including a chance for workers to immigrate with fewer restrictions to take advantage of better jobs that may be available to them.

There are always significant advantages and disadvantages to consider with any contractual arrangement, so here are the pros and cons of free trade to consider.

List of the Pros of Free Trade

1. Free trade increases economic growth for each country. In the United States, the economy grew at roughly 0.5% more during the 25 years that NAFTA was in place compared to what it would’ve been if the free trade in North America had remain the same. Mexico experienced an increase in job opportunities from the free trade arrangement, while Canada was able to increase its export opportunities to its neighbors from the south. Although the countries were already exchanging $1 trillion in goods and services before the agreement, this volume expanded by over 125% after it went into effect.

2. It offers a more attractive business climate to organizations. Businesses are often protected when countries are trading with one another frequently. When there is a free trade agreement in place, then these protections begin to disappear. This process creates more of a free market environment where companies are forced to look for new ways to innovate as a way to stay competitive in the marketplace. Instead of allowing for stagnation to occur because there is always a guaranteed income, governments pursuing free trade increase economic opportunities because they inspire new processes.

3. Free trade will usually lower government spending habits. One of the ways that a government works to protect its local industry segments is through the use of subsidies. These benefits may include tax incentives, monetary rebates, protective tariffs, and other market manipulations which allow the corporation to function closer to a monopoly then if it were forced to compete on a global stage. Free trade lowers the expenses that for which a government must budget because companies no longer require the same protections. They can become competitive in multiple markets all at once. This spending on protectionism can then be applied to other societal needs.

4. It offers consumers access to a higher level of expertise. When companies are operating in international affairs, they have more access to information. This data allows them to create more effective best practices that will eventually help them to save money because they can cut the costs of their overhead. With the presence of free trade in the economy, these organizations can then provide access to their experience by working with domestic providers who are serving local households. That makes it possible for everyone to benefit from the expanded trade opportunities.

5. Free trade can improve the safety of workers. When companies are reviewing their best practices, then there are several sectors that they review for improvements. Employee safety is usually one of the first beneficiaries of a free trade agreement. This outcome is especially relevant when considering the manufacturing, mining, and oil producing industries. When workers can stay safe on the job, then they can remain productive, helping each organization to eventually improve its bottom line.

6. It allows for companies to transfer technologies to one another. When there is a free trade agreement in place, then the multinational companies make it possible for local organizations to receive access to the latest technologies from their industry. This process makes it possible for the local economy to start growing, which means there are additional job opportunities that begin to develop. The transnational corporations can even help provide training at the domestic level as a way to provide experience to future workers who may want to reach out to the global community one day.

7. Free trade results in higher levels of foreign direct investment. When there are fewer restrictions in place for companies who want to do business overseas, then domestic organizations and local communities benefit from a higher level of foreign direct investment. These funds help to add capital as local industries begin to look at the potential for expansion efforts. It is also a way to boost the influence that domestic businesses have within the region.

From the perspective of the United States, this advantage of free trade makes it possible to provide a currency of value (namely the U.S. dollar) to developing countries that would normally stay isolated without an agreement in place.

8. It can provide a direct economic boost to border communities. When there is a land border between two countries that have a free trade agreement, then the import/export transactions for the two governments occur at the ports of call which exist along this line. This structure has a positive effect on both local economies almost immediately. During the first year of NAFTA, the apparel and metal industries in Texas saw 13% growth because of the number of additional exports that were going across the border to Mexico.

List of the Cons of Free Trade

1. It reduces the tax revenues that are available to the government. A free trade agreement creates a shift in how value enters the society. Before there is an implementation of this contract type, goods and services develop revenues for the government through the use of tariffs and fees. Once this agreement goes into effect, then the money flows to the corporations instead. It then becomes the government’s responsibility to collect taxes from the profits and revenues earned from the new structure. That is why many smaller countries try to avoid free trade. They often struggle to replace the revenues that import tariffs and miscellaneous fees generate for them.

2. Free trade can reduce the influence of native cultures. As free trade begins to move into the isolated areas of a country, the indigenous cultures which are present there can sometimes struggle to adapt to the changing realities. There may be a need to access the resources which are available locally to these tribes for the “greater good” of the rest of the country. If the decision is made to pursue this need, then it is not unusual for local communities to be uprooted. Their exposure to new population groups can then result in disease, suffering, and even death in extreme circumstances.

3. It can begin to degrade the value of domestic natural resources. Countries that have already gone through their industrial revolution will typically have fewer natural resources available to them when compared to the developing world. That creates the purpose of pursuing a free trade agreement in the first place. These emerging market countries do not have the same environmental protections in place because they have not experienced the same pollution challenges as the developed world.

That is why free trade agreements can often lead to the depletion of natural resources through mining, timber operations, and mineral extraction. It does not take long for the fields and jungles of a developing country to be reduced to wasteland because of strip-mining and deforestation efforts.

4. Free trade can encourage poor working conditions. The minimum monthly wage for garment workers in the United States in 2017 was $1,864. If a free trade agreement was created with the countries of Southeast Asia, then corporations could take advantage of the lower minimum monthly wage in Bangladesh. Companies were required to pay their workers a minimum salary of $197 per month. Now imagine that you have 10,000 workers who are producing apparel items for you. Where would it be cheaper to manufacture your items?

The issue is more than one of wages. It is also a concern about working conditions. The developing world does not have the same protections in place for workers. Some locations do not even have restrictions on youth labor. Although a free trade agreement can encourage local development that improves this issue, there is no guarantee that it will happen.

5. It can eliminate the presence of domestic industries. When there is a multinational company trying to do business in a local community, then the mom-and-pop shops have no way to compete. That is because the organizations which are involved in multiple markets can operate on a larger scale than small domestic businesses. Even though the giants of each industry work with small businesses to encourage a healthy economy, it is the Walmarts and Amazons of the world which can always offer consumers a better price. If a customer has the choice to purchase the same item from a family-owned business at $6 or one from Walmart for $2, the latter options usually wins out.

6. Free trade can encourage the theft of intellectual property. When the United States and China put together a free trade agreement, there was a belief on the American side that it would be possible to expand business opportunities exponentially with market access overseas. Then the reality of the situation hit. Chinese companies, which are all mostly owned by the government, required Americans to sign over their intellectual property rights as a way to gain access to the market. It created a net win for China and a net loss on the U.S. side because if the American companies refused, the Chinese ones just stole it anyway.

7. It can result in more job outsourcing. Let’s go back to that idea where a garment industry firm could pay employees $1,600 less per month by shifting production from the United States to Bangladesh. Even if there are more logistics issues to worry about after the job outsourcing occurs, there is nothing in place to stop the company from reaping significant rewards. That is why tariffs are often in place from the very start. It creates a disincentive for organizations to outsource their labor, and then import the product back to consumers at the same price. U.S. manufacturers did that after the creation of NAFTA because of the differences in labor cost too

The pros and cons of free trade are generally positive because it creates a system that is closer to a free market with the countries involved with the contract. Although there are challenges to consider, especially with a poorly-written agreement, it is the consumer who wins at the end of the day. When they have access to more innovation and expertise, then they can have their problems solved more effectively.

12 Pros and Cons of Free Trade

Free trade occurs when it is left to its own devices. This means there is no interference with quotas, tariffs, or other restrictions when completing an agreement. The trade is based on market forces and demands instead of being encouraged through subsidies or restricted through taxation. No discrimination occurs.

Although free trade is often discussed in political conversations, it is rarely practiced in the modern world. Would switching to a system that encouraged free trade instead of the current system be beneficial to the nations of the world? Or would it cause more harm than good?

Here are some key points regarding the pros and cons of free trade to consider.

What Are the Pros of Free Trade?

1. Economic growth is encouraged. Even when taxes, tariffs, and other restrictions on trade are highly regulated instead of being fully eliminated, there is an economic benefit to all parties involved. Because of NAFTA (North American Free Trade Agreement), the US Trade Representative Office estimates that economic growth has been 0.5% higher annually than it would be if the free trade agreement was not active.

2. Lower taxes and barriers to entry increases business opportunities. Protections are put into trade agreements as an effort to protect local businesses. When these protections are removed, the result tends to favor the consumer because more competition from global entities can occur at the local level. This reduces stagnation within markets, though at the risk of eliminating smaller businesses from the equation. Lower taxation and fewer barriers to entry can also reduce pricing for customers.

3. It creates opportunities for foreign direct investment. When there are fewer barriers to trade agreements in place, foreign businesses form partnerships, make investments, and even directly enter new markets because there is the chance for higher profits. This helps isolated countries can develop their economic infrastructure. Nations like the US and Canada use agreements to maintain economic benefits for both through shared values and vision, promoting a better standard of living for everyone.

4. More expertise is brought into the process. Global companies generally have more expertise within their field that local companies that operate on a domestically regional level. This means specialty work can be completed for a lower price, more efficiencies can be built into the systems of operation, and fewer resources are required to produce goods or services. Local companies can even learn from global companies to improve their best practices by direct observation.

5. It reduces government expenditures. Local industry segments, such as agriculture, are often subsidized by local governments. By introducing new best practices and building new efficiencies into distribution systems, less money needs to be provided by the government to keep prices affordable at the local level. This means tax revenues can be funneled toward infrastructure, social programs, defense, or other needs that a society may have.

6. Resources transfer to the best possible people and organizations. The people who are the best at what they do will have the most opportunities to succeed in an environment of free trade. It also means anyone can change their stars and achieve their dreams because of the desire to work with those who are the best. Companies follow this principle by being able to develop or access new technologies or better best practices to help local economies grow. When that growth occurs, more employment opportunities can be realized as well.

What Are the Cons of Free Trade?

1. It causes employment opportunities to be outsourced. Global companies may bring more expertise and better practices to a local industry, but who gets those jobs? Free trade causes jobs to be outsourced because international workers are either more experienced, cheaper to hire, or are willing to work with fewer safety protections. Tariffs and taxation policies help to reduce labor outsourcing because it keeps product pricing at competitive levels.

2. There are reduced IP protections. Intellectual property rights may not be taken as seriously by foreign governments or competitors as they are domestically. Inventions, patents, and processes may be copied in an environment of free trade and that reduces the potential of a company being able to create good jobs at fair wages. Even when these protections are in place, there is no guarantee that a foreign government will enforce the laws with the same rigor as a domestic government.

3. It encourages urbanization. There are two farms. One is a small family operation, while the other is a factory farm operation. The factory farm receives the same subsidies as the family operation, but because they produce many more products, they receive much more help from the government. This allows them to sell products at lower prices, which stores like because it generates more sales. Eventually, the family farm must either find its own niche to compete or the workers must look for employment elsewhere. That is why free trade often encourages urbanization.

4. There are often sub-standard working conditions. Emerging markets and developing countries do not usually have the same laws in place that guard worker salaries and working conditions. Some markets even allow for children to be hired for heavy labor and factory positions that are sub-standard at best. Because free trade puts a point of emphasis on the lack of restrictions, it can promote poor working conditions that people are forced to endure if they wish to earn a living for their family.

5. It does not usually protect the environment. Many free trade opportunities are based on the availability of natural resources. This causes the fastest harvesting methods possible to be used, such as clear-cutting or strip mining, and that can create long-term damage for local environments. It also means that natural resources are quickly depleted for the local population. An economy that is built on this process will often fail because once the resources are gone, there is nothing left to trade.

6. Free trade reduces revenues. When free market principles can operate without being checked, revenues typically reduce because of high competition levels. This helps large countries, organizations, and entities because they are already priced into an economy of scale. Smaller countries, companies, and entities must find ways to replace the revenues they lose and this is not always possible.

The pros and cons of free trade show that it can be beneficial, but it must be approach by looking at the long-term consequences will be. The goal for any company is to improve profits. The goal of any government is to provide the best possible protections for its people. Full trade protectionism will not do this, but neither will free trade. The best solutions tend to be a mixture of the two so that safeguards can be put into place to protect everyone.

INTERGOVERNMENTAL RESEARCH AND POLICY JOURNAL

A ‘HIGH-EFFICIENCY FACTOR JOURNAL’

An Open Access Article

Article History at IRPJ

Free Trade and Global Inequality: Why the World Trade Organization and the International Monetary Fund Continue to Advocate for Free and Unfettered Trade?

Dominic Hakim Silvio

Corresponding Author:

Pr Devender Bhalla, HDR (Editor) Email: [email protected]

This paper looks at why free trade is encouraged by the World Trade Organization (WTO) and the International Monetary Fund (IMF) despite causing so much poverty and inequality globally. Using published research, it argues that free trade has increased poverty and inequality globally through job outsourcing, degradation of natural resources, and poor working conditions. These organizations support free trade because they are controlled by economists whose role in trade debates is especially pernicious and less honest.

INTRODUCTION

Every time one opens the television, reads a newspaper, or listens to the radio, one encounters the concept of free trade. The food we eat, the clothes we wear, and even the digital programming we consume all point to this beautiful idea of free trade – a policy that does not restrict imports or exports. Free trade is supposed to lower prices for consumers, raise the economy in developed and developing countries, and eliminate unfair global commerce barriers. Many proponents of free trade argue that it is the fastest way to reduce poverty. Increased international trade has been widely presumed to make households in developing countries better off. 1 Over the past decades, developing countries have implemented large-scale trade liberalizations and become integrated into the global trade system with the false hope that it will alleviate poverty and inequality.

The conception that free trade is good for the poor is so prevalent that many notable financial institutions such as the World Trade Organization (WTO) and the International Monetary Fund (IMF) embrace it with nearly dogmatic ideological passion. 2  These multinational organizations believe that “free trade will ameliorate poverty by increasing growth and reducing inequality.” 3 The World Bank, in particular, cites correlations between free trade and growth and finds evidence that exponential rise in both leads to a decline in poverty and inequality. 4 The International Monetary Fund holds that “economic growth is the most significant single factor contributing to poverty reduction,” although “some poor and vulnerable groups can be adversely affected in the short-run.” 5 Many philosophers, economists, and lawyers are similarly convinced that the case for free trade is strong because it will reduce poverty. 6

We all know that there is a lot of poverty and inequality in the world. One cannot open the television and listen to the news on the radio or social media without encountering social inequality and poverty. According to Chen and Ravallion, about half of the world’s population lives on the equivalent of what two dollars a day purchases in the US. 7 Furthermore, a 2020 Oxfam International study found that the world’s 2,153 billionaires or wealthiest people have more wealth than 4.6 billion people, which signifies that economic inequality is prevalent and out of control. 8

This paper focuses on the consequences of free trade. It argues that free trade has contributed to the prevalence of global poverty and social inequality. Research shows that free trade has contributed significantly to global inequality through deplorable working conditions, job loss, economic damage, and global environmental damage to some countries. The paper is structured into four parts. The first section looks at free trade and poverty. The second section will focus on free trade and income inequality. The third section will explore the relationship between free trade and environmental degradation. The last section will focus on why the WTO and IMF advocate for free trade.

Free Trade and Poverty

The relationship between free trade and poverty has received considerable attention. The number of literature reviews alone is so large by now that it seems that a review of literature reviews would be appropriate. A quick search of “free trade” and “poverty” on google retrieves numerous hits, all of which suggest that free trade is the solution to global poverty, most of which are published by the IMF or the World Bank. As noted above, the academic literature is awash with published articles that support the notion that free trade positively affects global poverty. Nevertheless, widespread and abject poverty’s continuous existence represents the greatest failure of these national policies required for economic growth and well-being. 9 However, one of the issues with this assumption is that to know how the poor are doing, there must be a concrete way of measuring poverty. Without a proven measure, it will not be easy to understand whether things are getting better or worse. Three poverty measures are currently used: the Human Poverty Indexes (HPIs), the World Bank’s poverty lines, and the Human Development Index (HDI).

These measures have been argued to have limitations. There are two versions of the HPI, and both look at literacy and survival rates. The HPI-1 looks at survival to age 40, and the HPI-2 looks at survival to age 60. The HPI-1 also considers access to safe water, health services, and adequate nutrition. The HPI-2 looks at the percentage of a population falling below an income poverty line and unemployment rates. The HPIs have not been around long enough to provide long-term poverty trends, so they are not helpful. The HDI combines the logarithm of Gross Domestic Product (GDP) per capita purchasing power parity (PPP), literacy, primary, secondary, and tertiary school enrollment rates, and life expectancy at birth into a single indicator. Both measures have been argued to have led to understating the extent of global income poverty and the inference without adequate justification that global income poverty has steeply declined in recent years. 10 Furthermore, poverty is multidimensional, and not all its aspects are determined by economic activity.

Apart from questioning the statistical and measurement methods used by the IMF, or the WTO, a considerable amount of empirical research has been done that argues against the notion that trade liberalization is essential to global poverty reduction. One such study was done in India, and the researcher “finds that trade liberalization led to an increase in the poverty rate and poverty gap in the rural districts where industries are more exposed to liberalization.” 11   Moreover, in Pakistan, a study that focuses on the effect of trade liberalization on poverty levels found that free trade does not significantly impact poverty reduction in the short or long run. 12   A similar empirical study on Pakistan also found that free trade does not considerably affect aggregate poverty and income inequality in Pakistan in the short run. 13   Furthermore, another considerable research investigating the effects of free trade on poverty in Asia and Africa found that free trade slightly positively impacts poverty. The analysis focused on the effects of trade liberalization on poverty in seven Asian and African countries: Bangladesh, Benin, India, Nepal, Pakistan, the Philippines, and Senegal. 14 A similar study from Thailand also found that free trade’s impact on poverty is industry and region-specific, with “provinces in which employers are concentrated in industries exposed to a greater tariff reduction experience more rapid poverty reduction and more income growth than less exposed provinces. In urban areas, this impact on poverty and income is also more pronounced.” 15

Similarly, a study in Brazil also found that poverty in urban areas tends to increase with increased trade liberalization. 16   In South Africa, researchers have found that “economic growth has been insufficient to make inroads into the high unemployment levels and that poverty levels have also risen.” 17   Furthermore, studies from many other African countries such as Ghana, Mozambique, Kenya, North Africa, Morocco, Madagascar, and Uganda, to mention a few, have come with the same findings. 18   Nevertheless, studies that find that free trade reduces poverty often cite that these positive impacts are experienced in countries where financial sectors are deep, education levels high, and institutions strong. In short, although this paper has tried to link free trade with increased global poverty, however, it is crucial to understand that these results are not unambiguous.

Free Trade and Income Inequality

The relationship between free trade and income inequality in developed and developing countries has received considerable attention in recent years. Like the studies on the impact of free trade on poverty, many reviews also support the assumption that trade liberalization reduces global income inequality. However, a significant number of other empirical studies have raised concerns about this dogmatic generalization of the impact of free trade on income inequality and have argued that free trade has worsened income inequality in more countries globally. A study from Turkey noted that income inequality was low before Turkey started trade liberalization, but income inequality increased exponentially after adopting trade liberalization policies. 19 Researchers have also found that trade liberalization widens the wage gap between skilled and unskilled labor in Chile. 20

Similarly, researchers noted that wage inequality significantly increased when trade liberalization was implemented in Argentina during the nineties. 21 Furthermore, studies from Mexico indicated that skilled and unskilled workers widened during the 1980s wage gap. The authors assess how this increased wage inequality was associated with Mexico’s sweeping trade reform in 1985 and found that the reduction in tariff protection in 1985 disproportionately affected low-skilled industries. 22   Another study that examines whether the KOF Index of Globalization and the Economic Freedom Index of the Fraser Institute is related to within-country income inequality by using panel data covering around 80 countries from1970 to 2005 concluded that freedom to trade internationally is robustly related to income inequality. 23

Likewise, a study on middle-income Latin American countries argues that there is significant evidence that the process of economic integration to the global market in Latin American countries “produced an increasing inequality through the destruction of formal employment.” 24   Additionally, a study that evaluated the impact of Pakistan’s agricultural trade liberalization on income inequality concluded that “agricultural trade liberalization increases income inequality and is somewhat detrimental to the rural household types, which gauge most of their income from the agricultural business.” 25

In Africa, a study that examined whether the liberalization policies have affected everyone’s income distribution equally found that, in general, trade reforms have increased income inequality. 26 These broad trends in inequality because of free trade is summed up by Harrison, McLaren, and McMillan, who noted:

One of the most robust trends in the last three decades of the twentieth century has been a rise in within-country inequality in a wide range of countries. This rise in inequality whether measured in income, wages, wage premia, or assets, has been observed in both the developed and developing worlds. Within the United States, Latin America, Asia, and Africa the gap between individuals has widened considerably. One plausible explanation for this increasing inequality is the rise in globalization. 27

In short, several studies published between 1990 and 2019 have documented an increase in inequality in developing countries such as Mexico, Colombia, Argentina, Brazil, Chile, India, and China that frequently paralleled major trade reforms. However, while it is evident that trade contributes to wage inequality within a country, the scholarly literature has concluded that it is not its primary driver.

Free Trade and Environmental Degradation

Trade liberalization and its impact on the environment have also received considerable academic focus, with many studies arguing that free trade will harm the environment. Many academics believe that relatively lenient environmental standards resulting from free trade will give developing countries a comparative advantage in pollution-intensive goods. 28 Considerable studies have backed these assumptions. For example, Managi (2004) analyzed the impact of trade liberalization on carbon dioxide level on 63 countries over 1960-1999 and found that “trade has harmful effects to the environment – one percent increase in trade openness increases carbon dioxide at 0.579 percent.” 29 Furthermore, a study in Nigeria has also concluded that trade liberalization’s total effects are detrimental to the environment. 30

Similarly, a study from Indonesia also noted that “if present environmental policies remain unchanged, projected economic growth and structural changes over the next two decades would add to environmental degradation and resource depletion in Indonesia.” 31 Moreover, a study seeking to investigate the empirical association between environmental degradation and trade openness in a panel of ASEAN countries concluded that trade liberalization causes poor ecological conditions. 32

Likewise, a study on trade liberalization and environmental degradation in China also found “that increased trade liberalization has opposite impacts on the environment due to different pollutants. Furthermore, “for air pollutants (SO2 and dust fall), increase in trade leads to more emissions, while for water pollutants (COD, arsenic, and cadmium), trade liberalization decreases emissions.” 33 Furthermore, a study carried out in Ghana also found that “trade liberalization has an adverse effect on emissions of carbon dioxide due to negative scale and composition effects of trade overriding the positive technique effect of trade.” 34 In short, these studies are not exhaustive; nevertheless, trade liberalization causes environmental degradation. Why are the World Trade Organization and the International Monetary Fund continue to advocate for free and unfettered trade? This question will be dealt with in the next section.

Why the WTO and IMF Advocate for Free Trade?

One of the reasons is that economists govern these institutions whose role in trade debates is especially pernicious. After all, as Baker noted, economists are dishonest about their models. They often exaggerate the benefits that their standard trade models predict. 35 For instance, free trade is based on comparative advantage’s economic principle. The comparative advantage argument shows that if a country specializes in producing those commodities with a comparative advantage, it can gain from trade. A country can gain from trade even if it does not have an absolute advantage in producing any good. The comparative advantage argument shows that developing countries can gain from trade even if they are not more efficient than rich countries at making anything. 36 However, the comparative advantage argument has been criticized extensively. First, it assumes zero transaction costs, full employment, and homogenous labor markets within each country. Second,  it also believes that goods produced in each country are identical and that consumers and firms strive to maximize utility and profit, respectively. Furthermore, it assumes that labor cannot move between countries but costs nothing for laborers to switch. 37

As noted earlier, many people, even economists, know that many of these assumptions are false in the real world. We can see that free trade may even hurt the poor without these assumptions. If, for instance, we do not assume that there will be full employment after trade liberalization, the argument does not tell us much about the distribution of benefits to individuals that will result from free trade. Poor people may not benefit from any resulting growth at all. They may even suffer. Poor people may, for instance, lose their jobs as production shifts to commodities made by people who are not poor. If non-economists controlled these institutions, they would not support these unfair trade policies. In short, the main reason why these institutions advocate free trade is because they are managed by economists who are too arrogant to admit that their policies are limited and fallacious. For example, the World Bank is known to be the most prominent and generous employer of economists. 38

Interesting also is that members of developed countries control these institutions. Without reservations, one cannot contemplate the probability of some exploitation element towards members of the developing world. There is the notion of ‘I don’t care’ because we are not the losers here, a sense of selfishness behind the aggressive promotion of free trade. Furthermore, it is ironic that these institutions are also advocating sustainable development. For example, the WTO’s main objective was to foster trade liberalization to benefit all the world’s nations, both developing and developed. Still, a proposal should also be responsible for sustainable development, 39 which is unprecedented considering that sustainable development and trade liberalization are complete opposites. Daly made it clear that there is a limit to growth, which many mainstream economists do not agree with, and likewise, these institutions do not also agree.

This paper has argued that free trade is not in the interest of the poor, albeit the rich. Research shows that free trade has contributed significantly to global inequality through deplorable working conditions, job loss, economic damage, and global environmental damage to some countries. Free trade has caused so much poverty and inequality globally. Yet, the World Trade Organization and the International Monetary Fund still advocate for free and unfettered trade; why? One of the reasons is that these institutions are run by economists whose role in trade debates is especially pernicious and less honest. Economists have considerable power in policy circles and have helped impose specific policies on the larger public. Another equally important reason is that the super-rich in developed countries benefits substantially from free trade.

• Nina Pavcnik, “The Impact of Trade on Inequality in Developing Countries. No. w23878. (National Bureau of Economic Research, 2017), 2.
• Nicole Hassoun “Free Trade, Poverty, and Inequality,” Journal of Moral Philosophy 8(2011): 5.
• World Bank, Globalization, Growth, and Poverty (Washington DC: The World Bank, 2002).
• International Monetary Fund, “Social Policy Issues in IMF-Supported

Programs: Follow-Up on the 1995 World Summit for Social Development,” (Washington DC: International Monetary Fund,

2000). para. 17–18. Available at: < http://www.imf.org/external/np/fad/wldsum/index.htm >.

• See, for instance, Malgorzata Kurjanska and Mathias Risse, “Fairness in Trade II: Export Subsidies and the Fair Trade Movement,” Philosophy, Politics, and Economics, vol. 7 (2008), pp. 29-56; Fernando Teson, “On Trade and Justice,” Theoria, vol. (2004), p. 1 92; Fernando Teson and Jonathan Klick, “Global Justice and Trade: A Puzzling Omission,” FSU College of Law, Public Law Research Paper No. 285, 2007. Available http://ssrn.com/abstract=1022996.
• Shaohua Chen and Martin Ravallion, ‘How Have the World’s Poorest Fared Since the Early 1980s?’ World Bank Research Observer 19 (2004), 141.
• Max Lawson et al., “Time to Care: Unpaid and Underpaid Care Work and the Global Inequality Crisis,” Policy papers, Oxfam International 20 January 2020, https://www.oxfam.org/en/research/time-care (Accessed 10 January 2021).
• Alan L Winters, “Trade and Poverty: Is There a Connection?” in Trade, Income Disparity and Poverty. Ben David, D.; H. Nordstrom and L. A. Winters, eds. Special Study 5, Geneva: WTO.
• Sanjay Reddy and Thomas Pogge, ‘How Not to Count the Poor’ in

Measuring Global Poverty, ed. S. Anand, and J. Stiglitz. (Oxford: Oxford University Press, 2006), 25.

• Petia Topalova, “Trade Liberalization, Poverty and Inequality: Evidence from Indian districts,” in Globalization and Poverty, (University of Chicago Press, 2007), 293.
• Muhammad Shahbaz Akmal, Qazi Masood Ahmad, Mohsin Hussain

Ahmad and Muhammad Sabihuddin Butt, “An Empirical Investigation of the Relationship between Trade Liberalization and Poverty Reduction: A Case for Pakistan,” The Lahore Journal of Economics 12, no. 1 (2007), 99.

• Imran Sharif Chaudhry and Fatima Imran. “Does Trade Liberalization

Reduce Poverty and Inequality? Empirical Evidence from Pakistan.” Pakistan Journal of Commerce and Social Sciences (PJCSS) 7, no. 3 (2013), 569.

• John Cockburn, Bernard Decaluwé and Véronique Robichaud. “Trade

Liberalization and Poverty-lessons from Asia and Africa,” Studies in

Trade and Investment 61 (2007), 103.

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(2013), 569.

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Enowbi Batuo and Simplice A. Asongu, “The Impact of Liberalization

Policies on Income Inequality in African Countries,” Journal of

       Economic Studies Vol. 42 No. 1(2015), 68.

• Ann Harrison, John McLaren, and Margaret S. McMillan. Recent

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New Test,” Canadian Journal of Economics/Revue Canadienne

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• Mete Feridun, Folorunso Sunday Ayadi, and Jean Balouga, Impact of

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Home — Essay Samples — Economics — Free Trade — Analysis Of Free Trade Versus Protectionism

Analysis of Free Trade Versus Protectionism

• Categories: Free Trade

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Published: Jun 9, 2021

Words: 1241 | Pages: 3 | 7 min read

Works Cited

• World Trade Organization. (n.d.). Understanding the WTO: What is the WTO? Retrieved from https://www.wto.org
• Bhagwati, J. N. (2002). Free trade today. Princeton University Press.
• Irwin, D. A. (2017). Clashing over commerce: A history of US trade policy. University of Chicago Press.
• Rodriguez, F., & Rodrik, D. (2001). Trade policy and economic growth: A skeptic's guide to the cross-national evidence. In B. S. Bernanke & K. Rogoff (Eds.), NBER macroeconomics annual 2000 (pp. 261-338). MIT Press.
• Baldwin, R., & Evenett, S. (2009). The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20. CEPR Policy Insight, 40.
• Baldwin, R. (2016). The great convergence: Information technology and the new globalization. Harvard University Press.
• Rodrik, D. (2018). Straight talk on trade: Ideas for a sane world economy. Princeton University Press.
• Hufbauer, G. C., & Schott, J. J. (2005). NAFTA revisited: Achievements and challenges. Peterson Institute for International Economics.
• Manova, K. (2013). Credit constraints, heterogeneous firms, and international trade. The Review of Economic Studies, 80(2), 711-744.
• World Bank. (2019). World Development Indicators 2019. Retrieved from https://databank.worldbank.org/source/world-development-indicators

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What Is a Free Trade Agreement (FTA)?

• How It Works

Free Trade Models

• Pros and Cons of Free Trade
• Public Opinion
• Real-World Examples
• Free Trade FAQs

The Bottom Line

• Fiscal Policy

Free Trade Agreement (FTA) Definition: How It Works, With Example

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

A free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them. Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.

The concept of free trade is the opposite of trade protectionism or economic isolationism.

Key Takeaways

• Free trade agreements reduce or eliminate barriers to trade across international borders.
• Free trade is the opposite of trade protectionism.
• In the U.S. and the E.U., free trade agreements do not come without regulations and oversight.

Investopedia / Julie Bang

How a Free Trade Agreement Works

In the modern world, free trade policy is often implemented by means of a formal and mutual agreement of the nations involved. However, a free-trade policy may simply be the absence of any trade restrictions.

A government doesn't need to take specific action to promote free trade. This hands-off stance is referred to as “ laissez-faire trade” or trade liberalization.

Governments with free-trade policies or agreements in place do not necessarily abandon all control of imports and exports or eliminate all protectionist policies. In modern international trade, few free trade agreements (FTAs) result in completely free trade.

For example, a nation might allow free trade with another nation, with exceptions that forbid the import of specific drugs not approved by its regulators, or animals that have not been vaccinated, or processed foods that do not meet its standards.

The benefits of free trade were outlined in "On the Principles of Political Economy and Taxation," published by economist David Ricardo in 1817.

Or, it might have policies in place that exempt specific products from tariff-free status in order to protect home producers from foreign competition in their industries.

The Economics of Free Trade

In principle, free trade on the international level is no different from trade between neighbors, towns, or states. However, it allows businesses in each country to focus on producing and selling the goods that best use their resources while other businesses import goods that are scarce or unavailable domestically. That mix of local production and foreign trade allows economies to experience faster growth while better meeting the needs of its consumers.

This view was first popularized in 1817 by economist David Ricardo in his book, "On the Principles of Political Economy and Taxation." He argued that free trade expands the diversity and lowers the prices of goods available in a nation while better exploiting its homegrown resources, knowledge, and specialized skills.

Mercantilism

Prior to the 1800s, global trade was dominated by the theory of mercantilism. This theory placed priority on having a favorable balance of trade relative to other countries, and accumulating more gold and silver.

In order to attain a favorable balance of trade, countries would often place trade barriers like taxes and tariffs to discourage their residents from purchasing foreign goods. This incentivized consumers to purchase locally-made products, thereby supporting domestic industries.

Comparative Advantage

Ricardo introduced the law comparative advantage , which states that countries can attain the maximum benefits through free trade. Ricardo demonstrated that if countries prioritize producing the goods that they can produce more cheaply than other countries (i.e., where they have a comparative advantage) they will be able to produce more goods in total than they would by limiting trade.

Advantages and Disadvantages of Free Trade

Rapid development.

Free trade has allowed many countries to attain rapid economic growth. By focusing on exports and resources where they have a strong comparative advantage, many countries have been able to attract foreign investment capital and provide relatively high-paying jobs for local workers.

Lower Global Prices

For consumers, free trade creates a competitive environment where countries strive to provide the lowest possible prices for their resources. This in turn allows manufacturers to provide lower prices for finished goods, ultimately increasing the buying power for all consumers.

Unemployment and Business Losses

However, there are economic losers when a country opens its borders to free trade. Domestic industries may be unable to compete with foreign competitors, causing local unemployment. Large-scale industries may move to countries with lax environmental and labor laws, resulting in child labor or pollution.

Increased Dependency on the Global Market

Free trade can also make countries more dependent on the global market. For example, while the prices for some goods may be cheaper on the world market, there are strategic benefits for a country that produces those goods domestically. In the event of a war or crisis, the country may be forced to rebuild these industries from scratch.

Free Trade Pros and Cons

Allows consumers to access the cheapest goods on the world market.

Allows countries with relatively cheap labor or resources to benefit from foreign exports.

Under Ricardo's theory, countries can produce more goods collectively by trading on their respective advantages.

Competition with foreign exports may cause local unemployment and business failures.

Industries may relocate to jurisdictions with lax regulations, causing environmental damage or abusive labor practices.

Countries may become reliant on the global market for key goods, leaving them at a strategic disadvantage in times of crisis.

Public Opinion on Free Trade

Few issues divide economists and the general public as much as free trade. Research suggests that economists in the U.S. support free-trade policies at significantly higher rates than the general public. In fact, the American economist Milton Friedman said: “The economics profession has been almost unanimous on the subject of the desirability of free trade.”

Free-trade policies have not been as popular with the general public. The key issues include unfair competition from countries where lower labor costs allow price-cutting and a loss of good-paying jobs to manufacturers abroad.

The call on the public to Buy American may get louder or quieter with the political winds, but it never goes silent.

The View From Financial Markets

Not surprisingly, the financial markets see the other side of the coin. Free trade is an opportunity to open another part of the world to domestic producers.

Moreover, free trade is now an integral part of the financial system and the investing world. American investors now have access to most foreign financial markets and to a wider range of securities, currencies, and other financial products.

However, completely free trade in the financial markets is unlikely in our times. There are many supranational regulatory organizations for world financial markets, including the Basel Committee on Banking Supervision , the International Organization of Securities Commission (IOSCO) , and the Committee on Capital Movements and Invisible Transactions.

Real-World Examples of Free Trade Agreements

The European Union is a notable example of free trade today. The member nations form an essentially borderless single entity for the purposes of trade, and the adoption of the euro by most of those nations smooths the way further. It should be noted that this system is regulated by a central bureaucracy that must manage the many trade-related issues that come up between representatives of member nations.

U.S. Free Trade Agreements

The United States currently has a number of free trade agreements in place. These include multi-nation agreements such as the North American Free Trade Agreement (NAFTA), which covers the U.S., Canada, and Mexico, and the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), which includes the Caribbean nation and most of the nations of Central America. There are also separate trade agreements with nations from Australia to Peru.

Collectively, these agreements mean that about half of all goods entering the U.S. come in free of tariffs, according to government figures. The average import tariff on industrial goods is 2%.

All these agreements collectively still do not add up to free trade in its most laissez-faire form. American special interest groups have successfully lobbied to impose trade restrictions on hundreds of imports including steel, sugar, automobiles, milk, tuna, beef, and denim.

Why Were Free Trade Zones Created in China?

Starting in 2013, China began establishing free trade zones around key ports and coastal areas. These were areas where national regulations were relaxed in order to facilitate foreign investment and business development.

What Is a Free Trade Area?

A free trade area is a group of countries that have agreed to mutually lower or eliminate trade barriers for trade within the area. This allows participating countries to benefit from reduced tariffs, while maintaining their existing protections for trade with countries outside of the area.

What Are the Arguments Against Free Trade?

Opponents often assert that free trade invites foreign competition with domestic industries, causing job loss and harming key industries. In some cases, free trade cause manufacturers to move their operations to countries with fewer regulations, rewarding companies that cause pollution or use abusive labor practices. In other cases, countries with weak IP laws may steal technology from foreign companies.

Free trade refers to policies that allow permit inexpensive imports and exports, without tariffs or other trade barriers. In a free trade agreement, a group of countries agrees to lower their tariffs or other barriers to facilitate more exchanges with their trading partners. This allows all countries to benefit from lower prices and access to one another's resources.

McMaster University. " On the Principles of Political Economy and Taxation ."

The Wilson Center. " Chapter 3: Trade Agreements and Economic Theory ."

Federal Reserve Bank Of St. Louis. " Free Trade: Why Are Economists and Noneconomists So Far Apart? "

Kansas State University. " Landon Lecture (April 27, 1978) Free Trade: Producer Versus Consumer ."

European Union. " The European Union, What It Is and What It Does ."

European Union. " Trade ."

European Union. " Types of Institutions and Bodies ."

U.S. Customs and Border Protection. " Free Trade Agreements ."

U.S. Customs and Border Protection. " North American Free Trade Agreement ."

Office of the United States Trade Representative. " Industrial Tariffs ."

Government of Canada. " Free Trade Zones in China ."

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Essay on Free Trade | International Economics

Here is an essay on ‘Free Trade’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Free Trade’ especially written for school and college students.

Essay # 1. Meaning of Free Trade :

The policy of free trade is one which does not impose any tariff or non-tariff restrictions upon free exchange of goods and services between the trading countries. Such a policy permits a country to buy and consume those goods, which it either cannot produce at all or can produce only at a higher cost. Similarly it can dispose of in foreign markets, without encountering any restriction or hindrances, those products or services in the creation of which it has the comparative cost advantage.

According to Adam Smith, the policy of free trade is “a system of commercial policy which draws no distinction between the domestic and foreign commodities and thus neither imposes additional burden on the latter nor grants any special favour to the former.” The free trade, therefore, signifies a non-discriminatory trade policy that places no artificial barriers upon free international movement of goods and services. In the words of Haberler, “…. free trade is the external trade system of liberalism which opposes every interference by the state with the free play of economic forces.”

The essence of free trade, in the opinion of Jagdish Bhagwati, is the complete absence of restrictions upon free exchange of goods and services. Free trade, to quote him, is the complete “absence of tariffs, quotas, exchange restrictions, taxes and subsidies on production, factor use and consumption.”

ADVERTISEMENTS:

In this regard, R.G. Lipsey writes, “…… a world of free trade would be one with no tariffs and no restrictions of any kind on importing or exporting. In such a world, a country would import all those commodities that it could buy from abroad at a delivered price lower than the cost of producing them at home.”

A policy of free trade, no doubt, implies an absence of trade barriers but the imposition of import duties for the consideration of obtaining revenues may be consistent with free trade, when these are not meant either to provide protection to home industries or to discriminate against the cheap imports from abroad. It may be explained through an illustration. Suppose the home country A imposes an import tariff of 15 percent on the product of foreign country B. The latter has cost advantage over country A, say by 25 percent.

In such a situation, country B continues to enjoy cost advantage over A despite the imposition of import levy. The flow of goods from B to A can still take place unhampered. At the same time, country A becomes able to secure revenues from imports. The import duty, in such a case, does not violate the principle of free trade. In brief, the policy of free trade means non-resort to any direct or indirect restraint upon the international flow of goods and services.

Essay # 2. Arguments for Free Trade:

The philosophy of laissez faire in the field of international trade came into prominence as a reaction to Mercantilist advocacy of trade barriers. The powerful voice in support of free trade was raised by Locke, Hume and Adam Smith. A renowned line of economic thinkers, including Ricardo, J.S. Mill, Bastable, Marshall and Haberler lent strong support to the cause of free international trade.

The main arguments in support of free trade are as follows:

(i) Maximisation of World Output:

If there is no tariff or non-tariff restriction upon international trade, every country is likely to specialise in the production and export of that commodity in which it has the greater comparative advantage or the least comparative disadvantage. The benefits of specialisation and division of labour can become available to all the trading countries and they will be able to make the optimum use of their productive resources.

As a consequence, the world output is likely to get maximised. When each trading country produces those commodities in the production of which it is most suited and imports those commodities, which it can procure more cheaply from abroad rather than producing them itself, the real incomes of all the trading countries are likely to rise. In this context Ellsworth remarked, “…. Since the income of any community or nation is large just in proportion to the extent to which it specialises, the greater possible freedom of trade is justified.”

(ii) Optimum Use of Resources:

The free trade leads not only to specialisation in production but also to factor specialisation. The diversion of all scarce productive resources to such industries where their productive efficiency is the maximum implies their ideal or optimum utilisation. In the conditions of free trade, there is little possibility of under-utilisation or wastage of scarce resources. Any scarcity of productive factors, at the same time, can be easily off-set through their import from foreign countries. Thus free trade paves the way for the optimisation of productive factors throughout the world.

(iii) Large Factor Incomes:

In the condition of free trade, the factor units can easily and quickly move either within the same country or between different countries for securing larger remuneration for their services. It is, therefore, possible that factor incomes such as wages, rents, interests and profits are higher under free trade than otherwise.

(iv) Optimisation of Consumption:

The free international trade enables a country to import products from the cheapest market and relieve the domestic shortages of goods. It also provides opportunities for the consumers to import and use superior varieties of products. The increased availability of consumable goods of better varieties at low prices assures the optimisation of consumption in the trading countries.

(v) Enlargement of Market:

The absence of restrictions upon trade results in an enlargement of the size of market as every country can dispose of its surplus production in foreign markets. Products of all countries can have global demand. The extension in the size of market gives strong inducement to raise production and investment, to introduce improved techniques, and to introduce new, superior and cheaper varieties of products.

(vi) Check on Monopolies:

Free trade implies free competition. The producers from different countries try to expand their sales in the markets of other countries. The price competition and introduction of newer varieties of products prevent the emergence of exploitative monopolies. In this connection, it must be pointed out that free trade does not provide a complete safeguard from monopolies. Even under free trade, there can be emergence of natural monopolies or strong local or international cartels capable of restricting output and manipulating prices.

(vii) Educative Effects:

Haberler explained that free international trade can inculcate in the population of a country such qualities as competit­iveness, inventiveness, urge for excellence, efficiency, acquisition of advanced skills in production, management and organisation. These educative effects emanating from free trade make the trading countries to achieve higher production frontiers.

(viii) Accelerated Development:

Haberler has greatly emphasized upon free trade as a means for accelerating the process of economic transformation in the developing countries. According to him, free trade can contribute in the process of growth in different ways.

Firstly, it enables the unrestricted import of raw materials and capital goods, which are essential for industrial expansion.

Secondly, free trade assists in an easy transfer of advanced technical know-how and entrepreneurship from the advanced to the less developed countries.

Thirdly, free trade facilitates large scale international capital movements to speed up the process of growth.

Fourthly, free trade promotes competition, efficiency and productivity and can create such capacities in the poor countries, which enable them to achieve higher levels of production, employment and income.

Essay # 3. Arguments against Free Trade :

Despite strong classical advocacy of free trade, the world drifted away from free and unrestricted trade. The less developed countries have been viewing it as an instrument of colonial exploitation. Even the advanced countries have been taking recourse to restrictions upon international trade for the realisation of their economic and trade interests. A number of theoretical and practical objections are raised against the policy of free trade.

The main arguments against it are as follows:

(i) Absence of Pre-Requisites of Free Trade:

The theoretical objection against the policy of free trade is that conditions necessary for it do not actually exist in the real life. Some of pre-requisites of free trade policy are prefect competition, perfect factor mobility, free working of price system and laissez faire. The absence of these requirements invalidates this policy altogether.

(ii) Cut-Throat Competition:

The free international trade leads to chaotic trade conditions because the advanced countries try to capture more and more foreign markets for their products by dumping their products at very low prices in other countries. This intense competition has serious destabilising effects particularly upon the LDC’s. For instance, flourishing Indian handicrafts were completely wiped out in the nineteenth century on account of relentless competition from the British mill-made manufactures.

(iii) Lop-Sided Development:

Free trade underlines the specialisation in production and export in these industries in case of which a given country has comparative cost advantage over others. The adoption of this principle means that other industries and sectors should remain undeveloped. The less- developed countries, which have comparative advantage in agriculture, will remain condemned as agricultural countries alone. Such lop-sided or unbalanced growth has serious economic and social consequences.

(iv) Excessive Foreign Dependence:

When a country adopts a policy of free trade on the basis of the principle of comparative cost advantage, it becomes excessively dependent upon the foreign country for the disposal of its production and for the import of varied products. Such an excessive dependence is detrimental to its interests both in the times of peace and war.

(v) International Transmission of Fluctuations:

The free trade results in the transmission of prosperity or depression from one country to another. For instance, if country A is plagued by recession or depression, the fall in purchasing power of the people causes a reduction in its imports. The reduced imports signify the reduction in the exports of country B.

A decline in exports of country B causes a reduction in income. Thus, the fluctuations get transmitted from one country to the other and an economic crisis assumes global proportions. The trade restrictions can effectively prevent such a possibility.

(vi) Import of Harmful Products:

Where there are no restrictions upon trade, there is a danger of large inflow of harmful and sub-standard products from abroad. The unrestricted import of such commodities is injurious for the health and efficiency of the people. It will have the effect of reducing the welfare of the society. In view of such adverse implications of free trade on social welfare function, the countries, at some stage, feel compelled to adopt restrictive measures.

(vii) Emergence of Monopolies:

The free international trade and intense foreign competition eliminate many business firms. Consequently, local monopolies or international cartels emerge. Their manipulation of supply and price to maximise profits results in the exploitation of people and hinders the free working of price system. The possibility of emergence of monopolies necessitates the imposition of restrictive measures upon trade.

(viii) Detrimental for Development:

Haberler’s viewpoint that free trade stimulates development process in LDC’s is difficult to be accepted by their economists and statesmen. The international exploitation of the raw materials and markets of the poor countries by the advanced countries through free trade for the last two centuries is ample evidence of the fact that it has serious adverse effects upon the growth process of the former. The development of infant industries and subsequent industrial diversification are unlikely to take place unless effective restraints upon foreign imports are enforced by the less developed countries.

In view of the reasons given above, both advanced and less developed countries have continued to drift away from the policy of unrestricted international trade since the First World War. No doubt, the international monetary and trade organisations have their avowed goal of re­establishing restriction-free trade, much success has, however, not been achieved in this direction.

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Dysfunction and division darken the WTO’s 30-year dream of free trade

As the organisation’s anniversary nears, borders around the world are closing again

When trade ministers gathered in the Moroccan city of Marrakech 30 years ago this month to sign the agreement creating the World Trade Organization (WTO), the mood was celebratory. The Berlin Wall had come down only recently, communism had collapsed, and there was optimistic talk of how the body would prise open new markets and act as the arbiter when disputes broke out between countries.

The atmosphere today is much darker than it was in April 1994. Any enthusiasm for groundbreaking trade liberalisation deals disappeared decades ago and has been replaced by covert – and often overt – protectionism.

Relations between the US and China are at a low ebb, and likely to get worse. Late last month, China formally opened a WTO case against the US in which Beijing attempted to safeguard its electric vehicle industry, saying Joe Biden’s subsidies to promote green manufacturing in America broke global trade rules.

The dispute over Biden’s Inflation Reduction Act (IRA) highlights three trends: an ebb tide for globalisation , the increasingly difficult relationship between the world’s two biggest economies, and the dysfunctional state of the WTO itself.

There is scant hope that China’s case against the US will ever be resolved, because the WTO can no longer settle disputes. Any country on the wrong side of a WTO ruling has the right to go to appeal, but the appellate body needs judges to operate and since late 2019 the US has been blocking any new appointments to the panel.

That’s not the only reason Washington will stand firm over the IRA. At root, the problem is being caused by China’s huge trade surplus with the US and the Biden administration’s conviction that America’s deficit is the result of unfair competition.

Responding to China’s formal objection to the financial support provided by the IRA, Katherine Tai, the US trade representative, said it was a case of the pot calling the kettle black, given China’s record of protecting its own manufacturers.

Neil Shearing, chief economist at the consultancy Capital Economics , says there has been a “substantial expansion” of China’s manufacturing capacity since the Covid pandemic. In part, he says, that reflects a response to increased global demand but it also – as in the case of electric vehicles – represents a deliberate policy decision by Beijing to go for market share.

Donald Trump, Biden’s rival in this year’s race for the White House, has promised tough action to prevent the American car market being flooded. Having slapped $300bn of tariffs on Chinese imports when he was president, Trump now says he would impose a 100% tariff on Chinese cars imported from Mexico, a 50% tariff on other Chinese goods and a 10% tariff on goods made elsewhere in the world.

“Those big monster car manufacturing plants you are building in Mexico right now and you think you are going to get that – not hire Americans, and you’re going to sell the car to us, no,” Trump said. “We are going to put a 100% tariff on every car that comes across the lot.”

Trump has made it clear he is not bothered by the possibility that China or other countries might respond with tit-for-tat measures that would penalise US exporters. “You screw us and we’ll screw you,” he said. “It’s very simple, very fair.”

Biden uses less emotive language, but in reality has taken a tough line with China on trade. Keith Rockwell, a fellow at the Hinrich Foundation and a former WTO director, says: “No matter who wins the presidential election, the future of US-China trade relations don’t look that bright. All of Trump’s tariffs are still in place. Biden hasn’t removed a single one.”

Shearing says: “One of the very few bipartisan issues left in Washington is the imbalanced nature of the US trading ­relationship with China. Investors may be nervous about the potential return of Mr Trump and the threat of a renewed trade war, but that conflict looks ever more likely, whether the next administration is Democrat or Republican.”

The US-China schism is not the only source of trade tension. As the WTO’s director general, Ngozi Okonjo-Iweala, noted, in addition to the familiar global north-south disputes there had been signs at the recent WTO ministerial meeting in Abu Dhabi of south-south splits. These reflect the insistence among some of the bigger developing countries – such as India and Brazil – that their voices should be heard.

Okonjo-Iweala declared that it could not be “business as usual” when she took over in Geneva just over three years ago, but has found it hard to forge agreement among the WTO’s 166 members.

Evan Rogerson, a former senior WTO official and now a fellow at the Centre for Multilateralism Studies in Singapore, says the recent WTO ministerial meeting in Abu Dhabi was a disappointment, failing to make any substantive multilateral progress other than the accession of two small countries – Timor-Leste and Comoros.

“Not going backward on a 25-year-old moratorium on e-commerce duties was touted as a success,” he says. “On the critical agenda items – agricultural trade, fisheries subsidies, and reform of the WTO’s dispute-settlement mechanism – ministers simply kicked the can down the road, undertaking to continue work and once more extend deadlines that few expect to be met.”

In a recent article, Okonjo-Iweala said meaningful reform would require developing countries to take a bigger role. “The bottom line is that concerted collective effort is required to deliver WTO agreements and create an organisation capable of tackling this century’s problems. Failure to achieve these aims can no longer be blamed solely on the United States – or any one country, for that matter – for lack of leadership or loss of interest.”

But the US stance will be critical if the WTO is going to fulfil its role policing global trade. Rockwell says if Biden is re-elected it is possible that he would be more open-minded in a second term about some trade issues – including the way disputes are handled. “If Trump wins, there will be no change,” he adds.

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Essay: Free Trade

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Free trade is a trade where countries carries out economic activities ‘without restrictions or barrier such as import and export tariffs’, barrier to market entry and policies (Johnston, Gregory, & Smith, 2011, free trade). Many countries have reaped benefits from free trade and especially developing countries. Some benefits include improvement in infrastructures, expanded markets, access to technologies, free movement of labour and capital, investment, and political relations in form of integrations. These benefits have played a major role in the economic developments of developing countries. However, some countries argue against free trade claiming that it is a burden to developing countries and they object it. Some arguments against include exploitation of developing countries by industrialised, environmental pollution, unemployment of domestic workers, and underperformance of domestic industries thus affecting the country’s economic growth. Free trade has positively impacted to developing countries by stimulating their economic development goals such as millennium development goals thus it can be said to be realistic in the real world.

Free trade was found to work out for countries such as Japan, South Korea, China, other East Asia countries, and most of the developed countries in the world. Trade liberalization led to development of these countries and to attainment of their current level of ‘developed countries’ in the world. The countries formed ‘free trade and economic partnership agreements that helped in negotiations of trade across borders was important in facilitating trade,’ technical support, services, environmental and social issues (Zeng, 2010 p. 651). The guidelines helped countries to carry out trade in a defined environment that prevented them from exploiting each other in terms of natural resources. As a result, the countries realised developments. This has also worked out for developing countries such as those in sub-Sahara Africa for example Egypt. Moreover, free trade agreements encourage foreign direct investments in developing countries increasing inward revenues to these countries. The increased revenues to these countries are channelled to development projects such infrastructures and improving social amenities to citizens. In addition, foreign direct investments create employment for domestic workers thus helping developing countries to lower their unemployment rates. This is one of the achievements that have contributed greatly to shifting of countries from undeveloped cycles to becoming developed. For example, foreign direct investment has contributed to development of China. China is among the developing countries that’ has the largest reserve of foreign direct investments’ (Chen, & Emile, 2013 p. 120). China has attracted many foreign investors due to reduced market barriers such as ‘uniform tax for both domestic and foreign investors’ and trade liberalization resulting to increase in its gross domestic product (Davies, 2013 p. 11). As a result, China’s economy has continuously grown making it among the most developed countries. This has shown how trade liberation impacted on the development of countries through trade agreement that encourages foreign direct investment.

Free trade allows free movement of labour and capital across countries and regions. Free movements of labour and capital ensure that countries under the trade treaties are able to acquire the necessary factors of production for their businesses that will help them to improve their productivity and output. In late 1950, some of the countries in Europe suffered shortage of labour while other experienced high levels of unemployment. For example, Italy experienced economic problems such as high levels of unemployment while other countries such as Germany were lacking different types of labour and shortage on experts (Zaiceva, & Zimmermann, 2008 p. 429). Presence of free trade that was steered by European Economic Community ensured that Germany could be able to get labour from Italy at no cost. As a result Germany was able to get experts that it lacked while Italy benefitted from reducing the level of unemployment. Free trade helps to settle unemployment problems in developing countries as it allow free movement of people from their countries to more developed ones where they are able to get employments. This in turn helps them to reduce unemployment rates and realise their economic goals from increased income from abroad. Consequently, the income of people increases resulting in improved standards of living for the people in developing countries. Free movement labour created employment raising the economic status of people, which was a greater achievement towards country economic goals on reduction of unemployment (Nicoleta, & Camelia-Daniela, 2011 p. 303). As a result poverty is reduced in these countries, which is one of the millennium development goals for them. Movement of highly skilled labour to developed countries also results in high performance of domestic industries thus increasing their productivity, which in turn contribute to economic growth of the recipient country. The initiative was purely inclined to economic gains and there was no any political involvement or interference during the whole process. Moreover, the policy saw drastic improvement of the economy in the region. From this literature, it can be noted that free trade provision to free movement of labour contributed both to reduction of unemployment and poverty, increased productivity, and increased living standard of citizens in developing countries thus fostering the economic developing goals of the countries.

Free trade policies enhanced trade, transport, agriculture, manufacturing industries, imports and exports in developing countries. ‘Free trade area covers all manufactured and agricultural products, although the timetables for reducing tariffs and removing quantitative restrictions and other non-tariff barriers differ, (Association of South Asian Nations, 2009 update on free trade). Due to entry of various industries in the market, infrastructures are improved in collaboration of state’s government and the industries for their market accessibility. Improvement of infrastructures such as roads, railways, communication, electricity, and social amenities by these industries serves as a gateway to developments in these countries. Increased developments results to increase in investments and thus a country realize its development goals of. Although a country does not benefit directly through revenues from tariffs and taxes, the industries help it to meet its development goals. , its development vision is addressed. Improvements of infrastructure such as transport, electricity and social amenities results to improvement of investment capacities of regions and countries, which in turn contribute to economic growth (Jovanovic??, 2013 p. 971). Policies that lift barriers on export and imports by lowering or elimination tariffs and duties encourage export and import of both goods and services to across the region. Developing countries are able to gain revenues from exports while imports supply them with necessary services and goods that are important in steering economic development. For example the European Economic Community elimination of import and export tariffs for its member states encouraged free movement of goods and services across the region in a common market (Bento, 2009 p. 73). Therefore, free trade has contributed greatly to development of small nations through improved trade that encourages export of goods and services without barriers.

Trade liberalization has increased countries integrations and as a result aid to trade inflow to developing countries in terms of technologies and capital has been increased. This has led to strong economic growth, which has been reflected by the increasing gross domestic product and exports for developing countries in East Asia, Africa and Latin America. For example, most of Latin America middle income level countries have integrated with developed countries such as china resulting to improvements of their financial system and consecutive developments (Chen, & Emile, 2013 p. 118). Consequently, technology transfer has led to shift to manufacturing industries, which has attracted investors to the countries. Technology has resulted to increase of improved productivity through lowered cost of production by lowering the cost of labour and increasing relative labour productivity. According to comparative advantage theory by Ricardo, a ‘country should concentrate on production of goods that is best suited at lowered cost in order to improve productivity and economy through export to a second country that is not good in production’ (Bento, 2009 p. 28). Developing countries have been able to achieve improved productivity and specialization through adoption of technologies that have been introduced in their countries by other developed countries through trade liberalization. For example, India has evidenced comparative advantage by employing labour intensive production skills in manufacturing and services that employs intensive skills as in software industries. This has led to its increased exports in its production to other Asians countries thus increasing its revenues and gross domestic income that has played a major role in its economic development. High technologies attract foreign investors and investments increase. Increased investments in the developing countries also results to significant decrease in levels of unemployment. Consecutive increase in exports from developing countries has been due to decreased barrier and reduced tariffs (Johnston, et al 2011, free trade). Therefore, it can be concluded that free trade is has helped countries to advance economically and realise their economic goals such as millennium development goals.

Free trade has led increased access of economic resources to developing countries and utilization of limited available resources thus stimulating their economic and social development. Small developing countries struggle with scarce and underutilised resources. Free trade allows free entry of other countries and investors to small developing countries and as a result, they participate in conversation of the available resources to economic development resources through ‘mobilization of capital and labour thereby improving the status of the country in the economy’ (Unger, 2010 P 171). Moreover, free trade gives small developing nations chances to obtain resources such as capital from already developed countries that assist them to attain economic development resources or utilize what they have. For example, countries from Asia such as India have developed due to trade liberalization where they have been able to obtain capital, labour and other necessary resources from already developed countries. If there were restriction and barriers between countries, it would have been very difficult for countries like India to realize their development. Therefore, free access to economic resources by developing countries have shaped their economies and helped in consecutive developments.

However, free trade has been argued to be unrealistic to small developing countries and instead it is detrimental to its economy by increasing level of unemployment, exploiting domestic companies, increasing pollution and lowering people’s standard of living. Free trade is viewed as means by which developed countries exploit domestic industries of developing countries thus affecting their economic development. Multinational companies such as Nike have been reported to exploit developing countries, (for example Asian countries) by recruiting cheap labour and taking advantage of reduced barriers to maximise on their profits (Irwin, 2009 p. 204). Free trade causes increased influx of imports in a country resulting to increased supply of goods in the market. This causes decrease in prices of goods and services causing domestic companies and industries to reduce their prices, which may result loss and reduced share of the market. Therefore, they become less competitive. This may affect the domestic industries by causing decreased growth and as a result crippling. Hence, for countries to protect their domestic industries, they ‘impose taxes on imports and policies that restrict imports’ that may cause price fluctuations in the market (Hanson, 2010 p. 204). For example, increased steel import to UK from Asia resulted in ‘decreased prices of motor vehicles and thus the car manufacturers and sellers experienced reduced prices thus making losses’ (Verband der Automobilindustrie, 2005 p. 34). The imposition of tariffs on imports decreases entry into a country market thus increasing the prices and the supply of goods by domestic companies. On the other hand, free trade has increased imports resulting reducing the price of good in the market, thus increasing the demand of imported goods and decreasing demand of domestic products thus affecting domestic industries economic growth and that of the host country.

Free trade has also been argued to be the cause of unemployment to domestic developing countries. Free trade does not limit both the entry of entrepreneurs and labour in a countries. This means that there will be transfer of skilled labours from different countries coming together with their manufactures and other entrepreneurs in the country to carry out their operations. This limits the country’s domestic workers from getting such employments and hence increasing the levels of unemployment to developing countries (Trentmann, 2008 p. 73). This increases dependency ratio to these countries and hinders them from realizing developmental goals such as decreasing unemployment rates. Similarly, due to lack of tariffs and barriers to market, many industries are established in the developing countries resulting to losses of some of the industries due to competition and hence the industries move to other countries leaving a gap in employment in the previous country. According to Isis Women, (2014 Free Trade Causes Massive Unemployment) free trade caused massive unemployment in Philippines in 1995 to 2001 with 53 firms being closed down resulting in loss of jobs for 80,319 workers as 29 downsized their human resource causing unemployment of 4,019 jobs. Similarly, free trade in US has led to relocation of most of companies to Mexico, India and other place of the world where tariffs could restrict industries from entry and thus enjoying a stable market. This led to mass unemployment in US. Free trade has been argued as form of colonialism and imperialism in disguise and instead of contributing to developments it results in exploitation of small developing countries (Igwe, 2013 p. 113). Free trade is believed to benefit industrialized countries because of their capital potential. Most developed countries target the third world countries as the host countries where they carry their investment through exploitation of their resources. They dominate in the economy of the host country ending up controlling most of its resources, revenues, and most development projects. In 19th century, free trade helped European countries such as ‘Britain to obtained natural resources from small developing countries and this became disadvantageous to colonized countries over years, creating a gap development between the countries’ (French, 2008 p. 13). This may lead to industries or companies controlling the government though being independent. Therefore, for government to avoid this problem, it imposes barriers, taxes and customs duties so that it can limit industries and also control their operations within the country (Hanson, 2010 p. 204). This has seen countries deviating from policies of free trade and moving back to controlled trade with little free trade that is allowed to the level of regions where countries have similar economic capacities and so there would be no likelihood of exploiting each other or feeling of unfairness for example in European union. Countries argue that free trade deny them access to sources of revenue from foreign investors that could otherwise be used in their development projects. The argument is laid on the fact that ‘free trade allows trade between countries without imposing tariffs and taxes’ (Wacziarg, & Welch, 2008 p. 197). Hence, the trade is exploitive to the developing countries. Most governments and particularly those from developing countries steer their economic development projects and caters for wages from revenues that they get from tariffs, taxes and licensing of businesses that operates within its territories and so, free trade deny them from accessing these funds. Hence, their development projects may end up taking time and making a country poorer as most of its resources are utilized at no benefits.

From the discussion, it can be concluded that free trade has been a reality to developing countries since it contributed greatly to development of current developed countries such as china, South Korea, and other European countries such as Germany and Britain. For example, China is one of the developed countries that have achieved its developments through taking advantage of free trade to attract investors to its country and it investing in small countries such as those in Latin America thus boosting its developments. Although free trade has been attributed by negative impacts on small developing countries, positive impact surpasses the negative one and thus contributing to most of developments in the small countries. Therefore, based on my opinion, I think that free trade has positively impacted to developing countries as it has stimulated their economic development goals such as millennium development goals. Hence free trade has been a realistic aspect to developing countries.

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