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.
Keith Miller has over 25 years experience as a CEO and serial entrepreneur. As an entreprenuer, he has founded several multi-million dollar companies. As a writer, Keith's work has been mentioned in CIO Magazine, Workable, BizTech, and The Charlotte Observer. If you have any questions about the content of this blog post, then please send our content editing team a message here.