Free Trade Agreement Pros and Cons

6 Advantages and 7 Disadvantages and Their Possible Solutions

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Free trade agreements can create jobs and training for domestic workers. fatihhoca/Getty Images

Free trade agreements regulate tariffs, taxes and duties that countries impose on their imports and exports. The most well-known U.S. regional trade agreement is NAFTA.

Advantages of Free Trade Agreements

Free trade agreements are designed to increase trade between two countries. Increased trade has six main advantages:

1. Increased economic growth. The U.S. Trade Representative Office estimates that NAFTA increased U.S. economic growth by 0.5 percent a year.

2. More dynamic business climate. Often, businesses were protected before the agreement. These local industries risked becoming stagnant and non-competitive on the global market. With the protection removed, they have the motivation to become true global competitors.

3. Lower government spending. Many governments subsidize local industry segments. After the trade agreement removes subsidies, those funds can be put to better use.

4. Foreign direct investment. Investors will flock to the country. This adds capital to expand local industries and boost domestic businesses. It also brings in U.S. dollars to many formerly isolated countries.

5. Expertise. ​Global companies have the more expertise than domestic companies to develop local resources. That's especially true in mining, oil drilling and manufacturing. Free trade agreements allow the global firms access to these business opportunities. When the multi-nationals partner with local firms to develop the resources, they train them on the best practices.That gives local firms access to these new methods.

6. Technology transfer. Local companies also receive access to the latest technologies from their multinational partners. As local economies grow, so do job opportunities. Multi-national companies provide job training to local employees.

Disadvantages of Free Trade Agreements

Free trade agreements are designed to increase trade between two countries.

Increased trade has six main advantages:

1. Increased economic growth. The U.S. Trade Representative Office estimates that NAFTA increased U.S. economic growth by 0.5 percent a year.

2. More dynamic business climate. Often, businesses were protected before the agreement. These local industries risked becoming stagnant and non-competitive on the global market. With the protection removed, they have the motivation to become true global competitors.

3. Lower government spending. Many governments subsidize local industry segments. After the trade agreement removes subsidies, those funds can be put to better use.

4. Foreign direct investment. Investors will flock to the country. This adds capital to expand local industries and boost domestic businesses. It also brings in U.S. dollars to many formerly isolated countries.

5. Expertise. ​Global companies have the expertise to develop local resources, especially in mining, oil drilling and manufacturing. Local businesses can learn new skills from them.

6. Technology transfer. Free trade allows local companies access to the latest technology and business practices. As local economies grow, so do job opportunities. Many foreign companies provide job training as well.

Disadvantages of Free Trade Agreements

The biggest criticism of free trade agreements is that they are responsible for job outsourcing. There are seven total disadvantages:

1. Increased job outsourcing. Why does that happen? Reducing tariffs on imports allows companies to expand to other countries. Without tariffs, imports from countries with a low cost of living cost less. It makes it difficult for U.S. companies in those same industries to compete, so they may reduce their workforce. Many U.S. manufacturing industries did, in fact, lay off workers as a result of NAFTA. ​​One of the biggest criticisms of NAFTA is that it sent jobs to Mexico

2. Theft of intellectual property. Many developing countries don't have the same protection for patents, inventions and new processes as the United States.

And, the laws they do have aren't always strictly enforced. Companies that take advantage of free trade agreements in these countries often have their ideas stolen. They must then compete with lower-priced domestic knock-offs.

3. Crowd out domestic industries. Many emerging markets are traditional economies that rely on farming for most employment. These small family farms can't compete with subsidized agri-businesses in the developed countries. As a result, they lose their farms and must look for work in the cities. This aggravates unemployment, crime and poverty.

4. Poor working conditions. Multi-national companies may relocate jobs to emerging market countries without adequate labor protections. As a result, women and children are often subjected to grueling factory jobs in sub-standard conditions.

5. Degradation of natural resources. Emerging market countries often don’t have many environmental protections. Free trade leads to depletion of timber, minerals and other natural resources. Deforestation and strip-mining reduce their jungles and fields to wastelands.

6. Destruction of native cultures. As development moves into formerly pristine areas, indigenous cultures can be affected as local peoples are uprooted and often killed.

7. Reduced tax revenue. Without import tariffs and fees, many smaller countries must find ways to replace that revenue.

Solutions to the Problems

Trade protectionism is rarely the answer. High tariffs only protect domestic industries in the short term. But, in the long term, global corporations will hire the cheapest workers wherever they are in the world to make higher profits.

The best solutions are regulations within free trade agreements that protect against the disadvantages. Environmental safeguards can prevent destruction natural resources and cultures. Labor laws prevent poor working conditions.

Developed economies should offset their subsidies to domestic agribusiness to keep emerging market farmers in business. They can help local farmers develop sustainable practices, and then market them as such to consumers who value that.  

Countries that are concerned about outsourcing can insist that foreign companies build local factories as part of the deal. They can require that these companies share technology and train local workers in the latest techniques. 

The World Trade Organization is the international body that helps regulate free trade agreements. That helps countries ensure that agreement regulations are enforced.