Pros & Cons of Free Trade
Posted In: Business & Finance.
Free trade is a term used to describe agreements between two or more nations to significantly relax trade restrictions among the participants. These would include things like tariffs, trade limits and import/export laws.
Pros of free trade
Relaxing the rules for exporting goods and establishing corporate presence in another country allows for an immediate increase in the potential market. By making it easier to export and import goods, manufacturers and retailers have greater access to both customers and goods for sale.
Equal and fair access to the market
The introduction of foreign goods can be a boon for the consumer, by providing greater choice in the stores. It also stimulates competition and can revitalize a stagnant market. Any loss of sales experienced by a manufacturer in their own country can be offset by the sales they are now able to make in the other nations participating in the agreement.
Benefits for the economy
Jobs can be created as well when companies open up offices, branches or franchises in participating nations.
More focus on what you do better
A carefully managed free trade agreement can help the various nations to specialize, each one focusing on the goods and services that come most naturally.
Cons of free trade
The biggest criticism of free trade agreements come from the ease with which jobs can be switched from one country’s work force to another. Often in such situations, one or more participating countries can offer manufacturers and support organizations tremendous savings. These savings are produced by lower labor costs, lower operating costs and, in many cases, a more relaxed view of regulation and oversight. Corporations will take advantage of lower costs to increase profits, but it often leaves a large portion of the local population without jobs.
Not fair for the richer country
As with most associations, the status of the participating nations are not equal. Many feel that with free trade, the lesser developed country in the agreement will receive a majority of the benefits at the expense of the more developed and prosperous nations.
More problems for the poorer country
Free trade agreements can also cause issues in the developing member nations as well. For example, Mexico’s family farm industry is rapidly disappearing as more and more workers are migrating to factory jobs created by NAFTA. While this helps US and Canadian farmers who are now exporting more food to Mexico, it has increased the dependence of Mexico on imported foods. Should prices go up, this could cause a major economic crisis.
Quality of products and services may drop
Moving jobs to the cheaper labor markets has a negative effect on customer satisfaction as well. In most cases, the labor pool in these countries is less educated and skilled than the workers that they are replacing. In manufacturing applications, this can translate into inferior products being brought to market. In customer service efforts, one of the most commonly outsourced job types, the language barriers can often frustrate callers more than help them.
Also see: Facts about World Trade Organization.