Pros and Cons of Free Trade in The Modern World

Just after WW2, there was a general belief that the lack of free trade was harmful and resulted in economic recessions and even depressions, specifically the Great Depression 1930, which was vividly within living memory of governments and societies then. These ideas were further supported by the foundation of the EEC in 1957 and then the creation of the WTO in 1995. Even Adam Smith and David Ricardo were firm believers in free trade. Nevertheless, today, in our globalized, interconnected world is free trade our enemy or an open door to affluence and innovation?

Free trade is the lack of any barriers for imports or exports of goods and services between countries. In the case of newly-developing economies, with the assumption of ceteris paribus, this would give the producers of palm oil in Malaysia (GDP $315 billion), for example, the same opportunity as producers of Netherlands (GDP $826 billion), meaning there would be equal chances of the palm oil from both countries being sold in the global market. This then benefits Malaysia resulting in the increase of its GDP, aiding its development, improving the lives of Malaysians, as there would be a larger value for injection into its economy via increased exports. However, without free trade, there would be import duties, making the Malaysian palm oil less competitive, therefore leading to a lower value of injections compared to the previous scenario, which would have less of a positive impact on its economy and development. An example of this is India raising its import tax on refined palm oil to 54%. However, some duties specifically target a country instead of a product, which would make the particular export very uncompetitive in the importing country. Managed trade, trade barriers and embargos largely affect developing nations, as their main export is a primary goods, which are generally cheaper and more price volatile, compared to manufactured goods or services that are usually exported by HICs. This means that per unit sold of each good, developing nations receive less revenue, emphasising the importance of free trade for these economies to maximise exports. This highlights the inequalities in the global economy, where supreme nations are able to manipulate global trade, subsequently but unintentionally affecting the growth of smaller economies, which displays how free trade can be advantageous to developing countries and battling the imbalance of economical and political power in the world. WTO and Fairtrade Foundation withhold and reinforce the significance of free trade to LICs.

Since trade is a “two-way exchange”, free trade has a further positive impact on developing countries, allowing them to import the necessary capital goods for cheaper in order to shift their PPF outwards in the future, which is essential for growth and development of an economy.

In addition, free trade has a positive impact on developed economies, as it allows for improvement of economics relations. Australia (GDP $1320 billion) has 11 Free Trade Agreement that “benefit Australian importers, exporters, producers and investors by reducing and eliminating certain barriers to international trade and investment”, as revealed by its government. It results in economical growth Australia has witnessed.

However, with increasing globalization worldwide, free trade allows firms to choose different manufacturing locations which minimize the cost of production. This is an option for firms as there no import or export duties on their goods or materials if they are made overseas, most of the time. This means many more products on the shelves of Walmart, Tesco and other superstores are produced abroad, as there are less regulations and significantly lower labour costs in countries, for example Bangladesh (GDP $250 billion). It allows the consumer to enjoy lower prices and a wider variety of products. Undoubtedly, it benefits us as mass consumers, unfortunately unemployment and human rights violations are also the result of this.

The technology giant, Apple, is failing to solve violations within its supply chain with the “human cost of its gadgets” becoming apparent in the past decade. The working conditions in its supplier factories in China are below the required norm, with workers not being paid fairly, resulting in protests, in 2017. This displays how the developing countries are suffering the social consequences of free trade and globalisation. Another negative externality is the environmental impact of global shipments and transportation. However, agencies and NGOs, such as Chinese Labour Watch, are reporting and raising awareness of this.

As most manufacturing and raw material extractions based in developing countries, it results in structural unemployment, where the primary and secondary sectors are not as prominent in the economies of Higher Income Countries. Industrial decline is a consequence of this, for instance in northern England and the Rust Belt in America. Nonetheless, it could be argued that this results in a thriving tertiary and then quaternary sectors, as the economy adapts, and different jobs are gradually created. It could be said that rapid industrialisation of some Lower Income Countries, that allows for manufacturers to choose those locations, leads to an information revolution in the more developed parts of the world and stimulates technological advancements globally. This supports the theory of specialisation, as efficiency is higher. Economic growth in turn leads to welfare and living conditions improvements.

In reality, free trade cannot fully exist, just like free market economies. There is still a level of government intervention in every economy, even be it Australia, ranking third most economically free country in the world. The alternative to laissez-faire attitudes is protectionism, which has been on the rise, especially with the current USA-China trade war. Despite some positives, such as duties to support domestic production and decrease environmental impact, free trade does less harm to the global market, allowing an economy to be more productive, expanding the global market and increasing competition, which are deemed as positive impacts.

Therefore, a nearly free trading global market has more of a positive impact on global economic growth and development, in the long term. This is implying that suitable institutions and agencies exist to monitor and prevent social and environmental damage.