One of the major causes and simultaneously consequences of modern globalization has been free trade. Free trade has become critical in globalized world by expanding diversity of not just goods, but technology and workforce. However, the issue remains controversial, despite evident economic benefits, the public of developed countries may feel negative attitudes due to undercutting of competition by nations with lower labor costs. Free trade is a fundamental principle of modern globalization that requires minimum government oversight but creates numerous economic and societal benefits with very few practically negative aspects.
Benefits and Challenges of Free Trade
Free trade allows for international exchange of goods that reduces barriers to import and export such as tariffs. Free trade essentially seeks to establish a global free market, as both theories of absolute advantage and comparative advantage suggest that nations should not artificially limit imports or promote exports, as the market will determine which producers and industries survive based on specialization. From a theoretical economic perspective, free trade brings benefits of employment, economic efficiency, and division of gains as there are higher and more effective outputs, which translates to revenue, benefiting both major market countries as the United States, and low-income producers as Thailand for example (Daniels et al., 2018).
One of the major benefits of free trade is economies of scale. Producers have greater access to cheaper resources and workforce around the world that are not covered by tariffs, and can create efficient supply chains. In turn, this creates economies of scale that results in lower prices for consumers, as well as a wide variety of choice for goods that can be easily imported from other parts of the world. At the same time, this leads to increased competition since borders are open, domestic firms must compete not just locally but with firms around the world. For consumers, that is beneficial since there are no longer monopolies on prices, but it may negatively affect some industries. Many manufacturing, not highly technological enterprises have moved factories abroad due to lower labor costs, resulting in massive job losses in industrialized countries. However, this job loss is also attributed to automation and changing market trends. That is the primary argument against free trade in public, with others such as negative influences on global equality. However, as seen over the years, globalization has brought numerous jobs and income to poverty-stricken nations, potentially contributing to narrowing the gap between poorer and richer countries (Collins, 2015).
Government Role
FTAs are achieved primarily on a political level, where the governments of involved countries usually negotiate the agreements over years. Once an FTA such as NAFTA is achieved, it is the government’s role to put in place the mechanisms of oversight as there usually numerous minor regulations that ensure certain national interests or safety. Such as with NAFTA, Mexico can import a certain number of cars annually into the U.S. to ensure some manufacturing continues in the country. While free trade implies an unrestricted flow of products and services theoretically, it is rarely so in practice. Governments continue to implement certain interventions such as tariffs, policies on trade restrictions, or subsidies to industries. These are done for revenue flow for the government, pursuit of economic or political policies, or protection of certain industries (Knight, 2015). There are virtually no FTAs other than the internal trade of the EU bloc where there are no restrictions whatsoever, but trade continues to increase globally, and FTAs contribute to easing many of these restrictions or government interventions.
Discussion
Free trade as a concept is not meant to be taken literally, as there certainly regulations in place both international and local to regulate the exchange of goods. However, free trade is meant to be more open and inclusive than traditional policies of protectionism or economic isolationism. The regulation in FTAs monitors to ensure that there are no violations of international treaties and suspicious activity that takes advantage of open borders. Furthermore, there is certainly collateral damage in the economy as certain industries in particular regions that will suffer fallbacks. Free trade is often criticized in public because of devastating effects to particular industries due to unfair foreign competition. However, that is the basis of economics, and as perfectly described by analyst Jeffrey Dorfman (2018), “It is trade which looks the most unfair that creates the most benefits because the potential gains are largest” (para. 1). The overall benefits of free trade are overwhelming for governments, consumers, and producers as FTAs lead to a reduction friction in trade, increase of access, and a decrease of costs that comes as a result of well-established supply chains.
Conclusion
Free trade is a fundamental element of global trade. It allows for benefits such as lower costs to consumers, diverse access to goods, and supply chains to resources improving economic growth in all countries. There are some negative aspects, but they affect specific industries and can be potentially mitigated. Governments continue to play an active role in negotiation and oversight of FTAs but significantly reduce interventions and protectionism measures in instances of agreements. Overall, the overarching benefits of free trade policies have had a significant benefit for global society and economics.
References
- Collins, M. (2015). The pros and cons of globalization. Forbes. Web.
- Daniels, J. D., Radebaugh, L. H., & Sullivan, D. P. (2018). International business: Environments and operations (16th ed.).
- Dorfman, J. (2018). The whole point of free trade is that it’s not fair. Forbes. Web.
- Knight, G. (2015). Government intervention in international business. The Wiley Blackwell Encyclopedia of Race, Ethnicity, and Nationalism.