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.