Pros and Cons of Free Trade

Pros and Cons of Free Trade
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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.
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
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
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.
Free Trade. (n.d.). In Encyclopædia Britannica online. Retrieved
Blinder, A. S. (2008). Free Trade. The Concise Encyclopedia of Economics. Library of
Economics and Liberty. Retrieved from
Froning, D. (2000). The Benefits of Free Trade: A Guide for Policymakers. The Heritage
Foundation. Retrieved from
McBride, J., & Sergie, M. A. (2017). NAFTA’s Economic Impact. Council on Foreign
Relations. Retrieved from
Johnson, K. (2018). Here Comes Trump's Trade War. Foreign policy. Retrieved from
Amadeo, K. (2018). Six Advantages of NAFTA. The balance. Retrieved from
Josephson, A. (2017). The Pros and Cons of NAFTA. Smartasset. Retrieved from
Meyer, D. (2018). How Donald Trump's Steel and Aluminum Tariffs Could Start a Trade War.
Fortune. Retrieved from

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