What Are the Costs of Free Trade?

The only perfect theory is one that’s on paper. This is true of any economic or philosophical concept because when it’s put in play, there’s always the human element that throws things for a loop. There’s a lot to love about economy-boosting free trade agreements, but they come with a dark side too. The cons of free trade are by no means small, but they often lose out to the bigger economic picture — the one where free trade stimulates the economy.

TL;DR (Too Long; Didn't Read)

Free trade can cost jobs in the employer's home nation, create sweatshops in the host nation and cost valuable nonrenewable resources as companies look for the cheapest ways to manufacture goods.

Free Trade Costs Jobs Too

In a globalist world of overhead, currency trading, politicking and financial quid pro quo, business tends to favor the path of least resistance. Bureaucracy doesn’t just slow business down, it costs money too. So, when free trade happens, it gives companies more options on where to base their operations. That's among the huge benefits of free trade agreements for developing countries.

So, back in the early days of the North American Free Trade Agreement, it was no surprise when American car manufacturers increased production in Mexico, where workers make a fraction of their Northern counterparts and where government is more flexible on policies. Outsourcing is even easier for things like customer service call centers, garment factories and any other sort of manufacturing.

It’s estimated that NAFTA, which was renegotiated and renamed in recent years, cost the U.S. around 900,000 well-paying jobs that were outsourced to Mexico.

Free Trade Agreements Create Sweatshops

Companies don’t just randomly pick nations for cheap labor; cheap labor abroad gets expensive with exporting and tariffs and duties. When free trade agreements form, though, tariffs and duties stop being a problem, and that’s how new industries spring up in places that may not have been on business’s radar before.

For instance, in Bangladesh, free trade agreements helped bolster the Bangladeshi garment trade — second only to China's — which employs over 12% of the country with wages that averaged around 32 cents per hour in 2017. American brands love using Bangladesh for garments, so it was an eye-opening tragedy when the Rana Plaza sweatshop outside Dhaka collapsed and killed over 1,100 workers, who were all toiling on clothing for major brands from around the world including Primark, Children’s Place, Mango and Benetton.

Free trade agreements were suspended in the wake of the tragedy, but practices haven't improved as much as watchers had hoped.

Intellectual Property Theft Is Common

Copyright infringement and intellectual property theft can be common in a free trade world when foreign countries don’t honor patents, trademarks and copyrights. This leads to the dreaded “knock-off” problem where products can be copied and replicated cheaply.

The Race to the Bottom

Other pitfalls of free trade agreements include environmental abuses in places like Brazil, where trade deals for beef and other products are causing the destruction of the rainforests. Strip mining is an example that’s common in struggling economies around the world.

Short-sighted governments allow for industry to capitalize on what they can today, with little regard for what it might mean to future fish stocks, forests, lands and other vulnerable natural resources.

Beyond the Cons of Free Trade

Free trade agreements are a great concept, and they create wealth and success in places that often haven't had such prospects. That 32 cents an hour in Bangladesh sounds terrible, but others there are trying to survive on far less. No one can argue that the proliferation of trade agreements hasn't created jobs in countries that desperately needed them. When those jobs multiply, health care and nutrition improve, opportunities increase and even life expectancy improves.

Still, for all the good that trade agreements do, it’s important to see how short they fall from being a perfect economic concept. Human rights and environmental impact are large problems that need solving.

References

About the Author

Steffani Cameron is a professional writer who has written for the Washington Post, Culture, Yahoo!, Canadian Traveller, and many other platforms. Some writing projects have included ghost-writing for CEOs and doing strategy white papers. She frequently writes for corporate clients representing Fortune 500 brands on subjects that include marketing, business, and social media trends.