Free trade

Free trade is an economic model in which goods and services are exchanged between parties without tariffs or government regulation. The benefits and drawbacks of adopting a worldwide system of free trade are the subject of heated debate, but most economists agree that free trade improves the overall wealth of the involved parties. The establishment of free trade has been compared to the improvement of farming equipment and factories, which made many jobs obsolete and caused economic upheaval while being implemented, but was ultimately deemed an improvement, as it also created new jobs and increased wages.

Because it is generally agreed upon that free trade improves aggregate wealth, opponents tend to be those who would personally suffer, such as business owners whose businesses would be unable to compete with foreign rivals. Ideally, under a free trade model, every person and every country would produce what they are best at producing, and then use the money from the sale of their products to buy those products they are not skilled at making.

Many detractors focus on the harmful effects that free trade has on the environment, since free trade agreements allow companies in countries with lax environmental regulations and little financial incentive to reduce emissions or control waste to compete with American companies, which have to expend a great deal of money to meet environmental regulations. The result, critics say, is that foreign companies have an economic advantage over American companies or that American companies will move their operations overseas to avoid compliance with US regulations. A similar argument claims that trade with countries that have poor conditions for workers reinforces the legitimacy of those conditions. Supporters of free trade, however, claim that free trade is beneficial for the environment, since products are more likely to be produced in places where production is easier and thus less harmful to the environment.

Proponents of free trade claim it is the most equitable trading practice, since foreign companies can compete on equal footing with domestic companies. Free trade allows companies to sell their products to consumers willing to pay the highest price and allows consumers to buy from the company selling the highest quality product at the lowest price. Free trade advocates claim that the taxes and tariffs imposed on imported goods makes it doubly hard for foreign producers to compete: because of the cost of exporting their goods into the United States, companies will be able to export less than they would without the tariffs, and these increased costs in turn mean they cannot produce as much.

Understanding the Discussion

Environmental Kuznets curve (EKC): An inverted, U-shaped graph that shows the relationship between income levels and environmental degradation. Created in 1993, the EKC is based on an earlier curve that showed the relationship between income levels and income inequality. The EKC shows that economic development increases environmental degradation in its early stages, but after a certain point that degradation slows.

Fair trade: Often posed as an alternative to free trade, a model that seeks to improve the social, labor, and environmental standards in developing countries that export goods to developed countries.

North American Free Trade Agreement (NAFTA): An agreement between Mexico, Canada, and the United States, signed in 1994, which sought to make trade between the countries simpler and less expensive, by reducing or eliminating tariffs and duties.

Protectionism: The philosophy embraced by countries opposed to free trade. Essentially, protectionism means that a country wants to protect its domestic business interests for fear that trade with other countries would cause their own economy to collapse or suffer. Protectionist practices increase the cost of imported goods or place restrictions on quantities of non-domestic products.

Quota: A fixed number of something. Applied to trade, import quotas limit the amount of a particular good that can be imported into a country.

Tariff: Taxes placed on imported products. The United States has variable tariffs, which can be as high as 100 percent for certain products.

Trade deficit: A trade deficit occurs when a country imports more goods than are exported. In theory, one major advantage of free trade is that trade deficits in certain sectors will be offset by trade surpluses in other sectors.

World Trade Organization (WTO): An international trade-regulation organization that both creates trade rules and resolves disputes through consensus negotiations between member-states.

History

The conception of free trade is usually credited to eighteenth-century economist and philosopher Adam Smith, whose treatise The Wealth of Nations (1776) outlined the idea and the benefits of free trade. David Ricardo, a British economist, built on Smith’s ideas, specifically his idea of specialization, eventually forming the theory of comparative advantage.

The United States Constitution explicitly established mandatory free trade between the fifty states, and for years trade with other nations was also essentially free. Following the stock market crash in 1929 and the subsequent years of economic downturn throughout the world, many countries became much more protective of their domestic industries and wary of trade with other nations. This protectionism only served to exacerbate the problem, however. While the United States slowly recovered from the slump, Europe and Japan became embroiled in World War II. After the war, the US emerged as the economic superpower, and other countries wanted to reopen trade. The 1948 General Agreement on Tariffs and Trade (GATT) helped reduce import tariffs in order to spur more trade. Despite backlash among workers in certain industries, GATT managed to increase trade significantly; the original 23 countries had increased to 142 by the time the World Trade Organization (WTO) supplanted GATT.

In January 1994, the United States signed a trade agreement with Mexico and Canada, extending the existing Canada-US Free Trade Agreement, to include the entire continent of North America in a free trade area. The North American Free Trade Agreement (NAFTA) is still one of the most comprehensive free trade agreements in the world, increasing US exports to Mexico 150 percent and to Canada 66 percent within the first decade. Nevertheless, it has been controversial since its inception. As with almost any institution of free trade in a country that has historically been protectionist, many industries were hurt by the sudden increase in competition, and the US trade deficit with Canada and Mexico grew significantly, from $16 billion USD a year to $82 billion USD a year. Estimates indicate that, within six years, NAFTA had resulted in the creation of 28 million jobs, with a net loss of 3 million jobs. Census figures show that by the end of 2014, the United States had a trade deficit with ten of its top fifteen trading partners; the trade deficit with Mexico was $181.5 billion and was $70.8 billion with Canada.

Among other concerns raised by the creation of the WTO and NAFTA, many people were worried about the environmental impact of allowing the United States to trade with less developed, less advanced, less environmentally conscious nations. Since other countries’ factories did not have the same environmental regulations and standards as US factories, foreign companies could produce equivalent products for lower prices, but at a greater cost to the environment. Since NAFTA did not require Mexican companies to match US environmental regulations, environmentalists argued that it would encourage those companies to cut corners with regard to emissions, pollutants, and other environmentally relevant issues.

Some economists also argued that, since American companies were held to these higher standards, they could not compete with their foreign counterparts. Thus, American companies would have good reason to move their heavily polluting operations overseas. The other side of this argument was that the increased revenue brought into developing countries would give them the incentive and the means to improve their environmental standards. These two arguments are known as the pollution haven hypothesis and the Kuznets Curve hypothesis, respectively, and they are still debated today, though neither has been shown to be entirely true. Opponents of free trade also argue that American manufacturing jobs will continue to disappear if foreign companies are allowed to freely compete with domestic companies.

The libertarian argument in favor of free trade is that the American economy has always prospered to a greater degree without government interference, and the global economy should be no different. Tariffs make it more expensive for both foreign manufacturers and domestic manufacturers (who often need to import raw materials, which are also taxed) to produce their products. The economic law of supply and demand means that tariffs and quotas necessarily make in-demand products more expensive than they would be if manufacturers could freely import as much of a product as they could produce.

Free Trade Today

Many people have pointed out the poor conditions and low wages paid to factory workers in other countries, particularly Asian countries such as Malaysia and China. Opponents of free trade say the United States should not trade with countries with such poor working conditions, since it only encourages those countries to continue such practices in order to maintain low production costs. Supporters claim that trading with these countries is often the only way to improve those conditions, since safer factories and higher wages require greater income. They also say that boycotting sweatshops is counterproductive, because they are often the only, or the best, employment option in poor countries. Compounding these problems, in the case of Malaysia, was the country’s insistence that any trade agreement with the United States include stipulations for giving preferential treatment to Malay companies, as had been the norm for decades. Talks between the United States and Malaysia began in 2006 but broke down two years later.

The United States has continued to expand its free trade agreements far beyond the NAFTA region. It entered into an agreement with the CAFTA-DR countries of Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua, effective as of 2005. Among the United States’ latest free-trade partners are Australia (2005), Bahrain (2006), Morocco (2006), Oman (2009), Peru (2009), Colombia (2012), Panama (2012), and South Korea (2012).

In October 2015, the United States and eleven other Pacific nations concluded negotiations on the plurilateral Trans-Pacific Partnership (TPP). The proposed TPP included the NAFTA countries, Australia and New Zealand, the Asian countries of Brunei, Japan, Malaysia, Singapore, and Vietnam, and the South American countries of Chile and Peru. In addition to the areas typically covered under a free trade agreement, the TPP aimed to address services, intellectual property, and investments, as well as environmental and labour concerns. Critics in the United States and other countries were wary of arbitration provisions that would allow a corporation to bring suit against a government, not before that country’s courts, but before an international panel.

Though for decades trends favored increasing free trade negotiation, the landscape changed with the rapid rise in 2016 of the presidential campaign of Donald Trump. Free trade had long been a cross-partisan issue, supported by some Democrats and Republicans and opposed by others within both parties. President Barack Obama's push for the TPP, for example, was not embraced by the whole of his Democratic Party, and was supported by some Republicans. However, Republican Donald Trump built his campaign in large part on a protectionist stance that railed against the alleged negative impact of free trade on the US job market.

Trump's victory in 2016 signaled a serious shift in US trade policy. Shortly after his inauguration, Trump signed an executive order pulling the United States out of the TPP. He also formed the White House National Trade Council to advise him on trade policy and appointed economist Peter Navarro, a strong trade protectionist, as its first director. Trump has also demanded that NAFTA be renegotiated and threatened to pull the United States out of the agreement if negotiations fail, and though he imposed a tariff on softwood lumber from Canada in April 2017. In September 2018, the United States, Canada, and Mexico concluded negotiations on what was called the United States–Mexico–Canada Agreement (USMCA), which would replace NAFTA once ratified by all three countries. Despite Trump's anti-free-trade rhetoric, the new agreement is still a free trade pact, but with updates that take into account the digital economy of the twenty-first century, and concessions such as giving US dairy farmers greater access to the Canadian market.

Some supporters of free trade, such as certain agricultural industry organizations and retailers, as well as free-market economists, continued to express the belief that provisions such as lower tariffs would ultimately benefit consumers and workers, despite the opposition of economic nationalists like Trump. Vigorous debate regarding free trade agreements’ environmental, labor, and even legal impacts remains.

These essays and any opinions, information or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

Bibliography

Books

Folsom, Ralph H. NAFTA and Free Trade in the Americas in a Nutshell. 5th ed. St. Paul: West Academic, 2014. Digital file.

Gallagher, Kevin P. Free Trade and the Environment: Mexico, NAFTA, and Beyond. Stanford: Stanford UP, 2004. Print.

Irwin, Douglas A. Free Trade under Fire. 4th ed. Princeton: Princeton UP, 2015. Print.

Odell, John S. Negotiating Trade: Developing Countries in the WTO and NAFTA. New York: Cambridge UP, 2006. Print.

Periodicals

Aggarwal, Vinod K. “U.S. Free Trade Agreements and Linkages.” International Negotiation 18.1 (2013): 89–110. Academic Search Complete.

De Luca, Tom, and John Buell. “Free Trade: A Paradox for Democracy.” New Political Science 28.4 (2006): 507–25. Academic Search Complete.

Lopert, Ruth, and Deborah Gleeson. “The High Price of ‘Free’ Trade: U.S. Trade Agreements and Access to Medicines.” Journal of Law, Medicine & Ethics 41.1 (2013): 199–223. Academic Search Complete.

Porter, Eduardo. "Trump’s Trade Endgame Could Be the Undoing of Global Rules." The New York Times, 31 Oct. 2017, www.nytimes.com/2017/10/31/business/economy/trump-trade.html. Accessed 28 Nov. 2017.

Rappeport, Alan. "Trump Hails Revised Nafta Deal as a Trade Promise Kept." The New York Times, 1 Oct. 2018, www.nytimes.com/2018/10/01/us/politics/nafta-deal-trump-canada-mexico.html. Accessed 1 Oct. 2018.

Roberts, Paul Craig. “Where Economics Fails: The Problem of Free Trade.” CounterPunch 16.3 (2009): 1. Points of View Reference Center.

Scaliger, Charles. “North American Union: From NAFTA to the NAU.” New American 29.17 (2013): 25–29. Academic Search Complete.

Surowiecki, James. “The Free-Trade Paradox.” New Yorker 84.1 (2008): 30. Print.

Tavernier, E. M., and A. Yadavalli. “Should the United States Continue to Pursue Free Trade Agreements? A Socio-Economic Perspective.” Journal of Tropical Agriculture 89.3 (2012): 189–98. Academic Search Complete.

Wilson, Michael. “NAFTA’s Unfinished Business.” Foreign Affairs 93.1 (2014): 128–33. Academic Search Complete.

Websites

Obama, Barack. “President Obama Defends the TPP.” Interview by Kai Ryssdal. Marketplace. Amer. Public Media, 6 Oct. 2015. Web. 19 Oct. 2015.

Office of the United States Trade Representative. Free Trade Agreements. USTR, n.d. Web. 19 Oct. 2015.