Advantages and disadvantages of free trade

Advantages and disadvantages of free trade

This article explores some of the advantages and disadvantages of free trade. It also explores how developing countries in particular benefit and suffer from free trade agreements. Needless to say that the U.S., the UK, the EU, Canada, India, Australia, Turkey, Tunisia, Mexico, South Africa, Norway, and Switzerland are famous for having free trade agreements with each other and/or with many other countries in the world. The U.S. has trade agreements with several countries in Latin America and the Middle East (Buchholz, 2021).

What is free trade?

Free trade refers to a policy by which two or more governments agree with each other not to discriminate against imports or interfere with exports by applying tariffs to imports or subsidies to exports (Encyclopaedia Britannica, 2021). When they sign up an agreement, it is called free trade agreement (FTA).

Advantages of free trade

Free trade agreements reduce and eliminate tariffs resulting in speedy flow of goods and services. Therefore, entrepreneurs are encouraged to invest in the economies of the countries concerned. In other words, countries obtain more benefits from foreign investments.

With FTAs, countries can import and export goods without any tariff barriers. This helps them reduce the prices of their products resulting in consumers enjoying and benefitting from affordable prices.

With free trade agreements in place, domestic companies will have to compete with foreign companies. Therefore, they must pursue strategies to reduce costs and invest in innovation to remain competitive. Due to this competition, customers are likely to get better products and services while not paying high charges.

Free trade agreements encourage countries to rely on each other for better goods and services. Because of this, they may put their political differences aside to strive for further economic integration benefitting both sides.

Disadvantages of free trade

Countries can achieve economic efficiency in the long-term with FTAs; however, many people lose their jobs in the short-term. For instance, some reports suggest that around 700,000 Americans have lost their jobs due to changing trade flows resulting from NAFTA (an agreement between United States, Canada, and Mexico). On the other hand, Mexico lost over 900,000 farming jobs in the first decade of the agreement (Darlington and Gillespie, 2017).

Some analysts argue that free trade agreements are negotiated by politicians who may have their own interests and may also protect the interest of big corporations. Therefore, small organisations often do not benefit from those agreements.

Advantages of free trade for developing countries

In addition to some of the benefits outlined above, developing countries also benefit from FTAs with high employment rates. As many companies in advanced economies often outsource some of their operations to developing countries, they create job opportunities for local people. Good incomes lead to a higher standard of living resulting in higher consumer confidence.

With FTAs, companies from developing countries gain access to developed markets. By selling their products and services to those markets, they can benefit financially. They also can learn from different consumer behaviour.

Disadvantages of free trade for developing countries

In addition to some of the disadvantages outlined above, developing countries also face some other challenges. For example, if a country keeps on importing products from abroad, its small companies may struggle to grow. Certainly, it is not easy to compete with global brands. Many small companies have been closed down due to unsustainable competitive pressure from overseas companies.

Native cultures in developing economies may be at risk due to free trade agreements. As development goes deep into the rural areas, local people are often displaced, and their cultures are ruined.

Many people argue and there are many examples that show that free trade agreements encourage businesses to move to countries with poor environmental and labour regulations. This exercise may sometimes lead to the abuse of workers and destruction of the environment.

We hope this article ‘Advantages and disadvantages of free trade’ has been helpful. You may also like reading Foreign Direct Investment. Other relevant articles you may be interested in are:

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Last update: 14 November 2021

References:

Buchholz, K. (2021) Which countries have the most trade agreements? Available at: https://www.statista.com/chart/18991/countries-with-most-trade-agreements/ (accessed 12 November 2021)

Darlington, S. and Gillespie, P. (2017) Mexican farmer’s daughter: NAFTA destroyed us, available at: https://money.cnn.com/2017/02/09/news/economy/nafta-farming-mexico-us-corn-jobs/index.html (accessed 12 November 2021)

Encyclopaedia Britannica (2021) Free trade, available at: https://www.britannica.com/topic/free-trade (11 November 2021)

Author: Joe David

Joe David has years of teaching experience both in the UK and abroad. He writes regularly online on a variety of topics. He has a keen interest in business, hospitality, and tourism management. He holds a Postgraduate Diploma in Management Studies and a Post Graduate Diploma in Marketing Management.