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.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.