Free Trade Agreements With Their Pros and Cons

Advantages and Disadvantages and Their Possible Solutions

© The Balance, 2018

Free trade agreements are treaties that regulate the tariffs, taxes, and duties that countries impose on their imports and exports. The most well-known U.S. regional trade agreement is the North American Free Trade Agreement.

The advantages and disadvantages of free trade agreements affect jobs, business growth, and living standards:

Key Takeaways

  • Free trade agreements are contracts between countries to allow access to their markets. 
  • FTAs can force local industries to become more competitive and rely less on government subsidies. 
  • They can open new markets, increase GDP, and invite new investments. 
  • FTAs can open up a country to degradation of natural resources, loss of traditional livelihoods, and local employment issues.
  • Countries must balance the domestic benefits of free trade agreements with their consequences.  

Six Advantages

Free trade agreements are designed to increase trade between two or more countries. Increased international trade has the following six main advantages:

  1. Increased Economic Growth: The U.S. International Trade Commission estimated that NAFTA could increase U.S. economic growth by 0.1%-0.5% a year.
  2. More Dynamic Business Climate: Without free trade agreements, countries often protected their domestic industries and businesses. This protection often made them stagnant and non-competitive on the global market. With the protection removed, they became motivated to become true global competitors.
  3. Lower Government Spending: Many governments subsidize local industries. 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 more expertise than domestic companies to develop local resources. That's especially true in mining, oil drilling, and manufacturing. Free trade agreements allow global firms access to these business opportunities. When the multinationals 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.

Seven Disadvantages

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 laws to protect patents, inventions, and new processes. The laws they do have aren't always strictly enforced. As a result, corporations 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 outsource 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 isolated areas, indigenous cultures can be destroyed. Local peoples are uprooted. Many suffer disease and death when their resources are polluted.
  7. Reduced Tax Revenue: Many smaller countries struggle to replace revenue lost from import tariffs and fees.

Solutions

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

A better solution than protectionism is the inclusion of regulations within trade agreements that protect against the disadvantages.

Environmental safeguards can prevent the destruction of natural resources and cultures. Labor laws prevent poor working conditions. The World Trade Organization enforces free trade agreement regulations.

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

Countries can insist that foreign companies build local factories as part of the agreement. They can require these companies to share technology and train local workers. 

Article Sources

  1. USDA Foreign Agricultural Service. "Trade Agreements." Accessed April 27, 2020.

  2. Congressional Research Service. "The North American Free Trade Agreement (NAFTA)," Page 16. Accessed April 27, 2020.

  3. Princeton University. "The Purpose of Trade Agreements," Page 9. Accessed April 27, 2020.

  4. USDA. "Regional Trade Agreements and Foreign Direct Investment," Page 80. Accessed April 27, 2020.

  5. USDA. "Regional Trade Agreements and Foreign Direct Investment," Page 79. Accessed April 27, 2020.

  6. Northwestern Journal of International Law and Business. "Trade and Technology Within the Free Trade Zone: The Impact of the WTO Agreement, NAFTA, and Tax Treaties on the NAFTA Signatories," Page 84. Accessed April 27, 2020.

  7. Congressional Research Service. "The North American Free Trade Agreement (NAFTA)," Page 27. Accessed April 27, 2020.

  8. Northwestern Journal of International Law and Business. "Trade and Technology Within the Free Trade Zone: The Impact of the WTO Agreement, NAFTA, and Tax Treaties on the NAFTA Signatories," Page 72. Accessed April 27, 2020.

  9. ADB Institute. "Exploring the Trade-Urbanization Nexus in Developing Economies: Evidence and Implications," Page 7. Accessed April 27, 2020.

  10. Brookings Institution. "Workers' Rights: Labor Standards and Global Trade." Accessed April 27, 2020.

  11. World Trade Organization. "World Trade Report 2010: D. Trade Policies and Natural Resources," Page 150. Accessed April 27, 2020.

  12. American University International Law Review. "Indigenous Peoples, Indigenous Farmers: NAFTA's Threat to Mexican Teosinte Farmers and What Can Be Done About It," Page 1,393. Accessed April 27, 2020.

  13. European Union Directorate-General for External Policies. "Addressing Developing Countries’ Challenges in Free Trade Implementation," Page 8. Accessed April 27, 2020.