Pros And Cons Of Free Trade

Running Head: PROS AND CONS OF FREE TRADE 1

Pros and Cons of Free Trade

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PROS AND CONS OF FREE TRADE 2

Free trade agreement (laissez-faire) is a policy that involves non-interference and non-

discrimination of imports and exports through tariffs and subsidies respectively. It, however,

does not mean that countries abandon all forms of control over imports and exports such as

taxation. It is based on the arguments of the theory suggested by Adam Smith that “the division

of labor among countries leads to specialization, greater efficiency, and higher aggregate

production” (Free Trade, n.d.). The North American Free Trade Agreement (NAFTA) is a good

example of a multilateral free trade agreement that involves Mexico, Canada, and the United

States. Recently, the US took a detrimental move of imposing tariffs on aluminium and steel;

thus, undermining NAFTA, and consequently, causing more harm than good to the US.

Free trade encourages member counties to specialize in what they can produce best. The

theory of comparative advantage developed by British Economist David Ricardo suggests that

specialisation in goods with lower opportunity cost for each country leads to economic welfare

boost for all countries involved (Blinder, 2008). Specialization of countries on goods they are

most efficient in producing will lead to higher output. Further, production of highly desirable

goods will also boost profits from their sale beyond borders. For instance, US farm exports to

NAFTA members Canada and Mexico increased sharply by 156 percent after the trade

agreement was made (Amadeo, 2018). The exports to the two countries combined were higher

than US farm exports to the next six countries combined (Amadeo, 2018). The US, therefore,

benefitted from specialising in the agricultural industry.

PROS AND CONS OF FREE TRADE 3

Free trade increases sales, market share, jobs and profit margins of industries in member

ountries. U.S exports account for over 12 million jobs in America and jobs related to trade pay

between 13 percent and 16 percent more than normal jobs (Froning, 2000). Since the birth of

NAFTA, trade with Canada and Mexico has grown by above 86% (McBride & Sergie, 2017).

That is from $290 billion in 1993 to more than $1.1 trillion in 2016 (McBride & Sergie, 2017).

Free trade is crucial to smaller countries that need to obtain economic resources. Emerging

economic environments also create high-profit market environments for industries that deal in

exports.

Free trade opens up the market and forces industry to be competitive to remain relevant

(Mcbride & Sergie, 2017). That results in better quality goods or lower prices for the consumer.

Moreover, ‘the most favored nation’ treatment which ensures that all countries in free trade

agreement treat others equally creates open ready markets for specialized products of the

member nations (Mcbride & Sergie, 2017). That, in turn, gives them a competitive advantage

against other industries in countries without the free trade agreement. Another benefit is that

NAFTA has led to cross-border supply chains, which have helped the US auto industry compete

with China by reducing costs, thereby resulting in lower prices (Mcbride & Sergie, 2017). The

US auto industry has been able to expand due to these lower costs.

Outsourcing of labor to countries with cheaper labor leads to loss of jobs for the more

developed country while the laborers in the lesser developed country are exploited. Domestic

industries are also threatened by cheaper goods from other countries. Laborers in Mexico are

willing to work for less money and in worse conditions than those in the US. That has led to the

transfer of numerous manufacturing jobs to Mexico to save costs. The CFR projects the job loss

PROS AND CONS OF FREE TRADE 4

in the auto sector to be around 350000 between 1994 and 2016 (Josephson, 2017). The threat to

domestic industries is also evident as between 2014 and 2016, steel production in the US

declined by 11% (Meyer, D. 2018). In addition, over the past 5 years, operational aluminum

smelters have fallen from 23 to only 5 (Meyer, D. 2018). The US has, therefore, reaped some

negative consequences of free trade

These disadvantages, however, are a narrow view of facts. The cheaper labor reduces the

cost of production which results in lower prices of goods produced. In addition, opening markets

to competition from other countries lead to better quality and prices for the consumer. Protecting

domestic industries is not always beneficial. “Although protectionism can have a siren-like

appeal because of its potential to provide short-term benefits to particular segments of the

economy, in the longer term it would almost certainly be destructive”(Johnson K. 2018). The

disadvantages of free trade are therefore not significant.

Despite the disadvantages, it is obvious that the advantages far outweigh the former. The

North American region has benefited greatly from free trade with the greatest beneficiary being

Mexico and the US benefitting moderately. Trump's administration seeks to protect domestic

steel and aluminium industries with the trade tariff. That, however, may prove more harmful than

beneficial. The affected countries are unlikely to watch idly, and both Canada and The European

Union have threatened to retaliate. Canada imposing tariffs in the agricultural sector could have

serious impacts on the US as it accounts for a large number of US agricultural exports. Free

Trade is, therefore, the best option available.

PROS AND CONS OF FREE TRADE 5

References

Free Trade. (n.d.). In Encyclopædia Britannica online. Retrieved

from https://www.britannica.com/topic/free-trade

Blinder, A. S. (2008). Free Trade. The Concise Encyclopedia of Economics. Library of

Economics and Liberty. Retrieved from

http://www.econlib.org/library/Enc/FreeTrade.html

Froning, D. (2000). The Benefits of Free Trade: A Guide for Policymakers. The Heritage

Foundation. Retrieved from https://www.heritage.org/trade/report/the-benefits-free-trade-

guide-policymakers

McBride, J., & Sergie, M. A. (2017). NAFTA’s Economic Impact. Council on Foreign

Relations. Retrieved from https://www.cfr.org/backgrounder/naftas-economic-impact

Johnson, K. (2018). Here Comes Trump's Trade War. Foreign policy. Retrieved from

http://foreignpolicy.com/2018/03/01/here-comes-trumps-trade-war-steel-aluminum-

tariffs-232/

Amadeo, K. (2018). Six Advantages of NAFTA. The balance. Retrieved from

https://www.thebalance.com/advantages-of-nafta-3306271

Josephson, A. (2017). The Pros and Cons of NAFTA. Smartasset. Retrieved from

https://smartasset.com/mortgage/the-pros-and-cons-of-nafta

Meyer, D. (2018). How Donald Trump's Steel and Aluminum Tariffs Could Start a Trade War.

Fortune. Retrieved from http://fortune.com/2018/03/02/donald-trump-steel-aluminum-

tariffs/

PROS AND CONS OF FREE TRADE 6

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