The Disadvantages of Free Trade

by Craig Berman; Updated September 26, 2017

Many economists tout free trade as the best way to maximize the potential of the global economy, but this playing field has winners and losers. Free trade may benefit individual businesses and industries that have the strength to compete without protective tariffs, and it might allow consumers to buy more goods at lower prices. But for some individuals, free trade can mean lost jobs, and for some countries, it can cause critical industries to vanish.

Job Losses

As trade barriers are eliminated, certain goods may be cheaper to obtain overseas than to make domestically. Because of that, job losses are likely as less competitive industries wither away. While most economists would argue that these workers can be allocated to more efficient industries in which the United States has a comparative advantage and that this benefits the country as a whole, that's not always likely or practical. Furthermore, those adjustments are easier to make in the long term than in the short term. It isn't always easy for someone who's worked in a factory all her life to start a new career as an information technology specialist, for example.

Predatory Pricing

If trade takes place with no barriers at all, even an efficient company may be burned by an overseas rival with a predatory pricing strategy. A foreign company with deep pockets, for example, might dump its products into the U.S. market to force everyone else out of the market. Once that occurs, the company will enjoy a monopoly position and be able to price accordingly. Some free trade agreements allow for retaliatory tariffs if such actions can be proved.

Increased Vulnerability

From a strategic perspective, free trade can leave a country vulnerable if it causes the demise of critical industries. If a country grows dependent on another for critical products or services, it can be subject to political pressure and denied access to the goods if the agreement is suddenly severed. Moreover, a country with a free trade agreement or a preferential trade agreement with a neighboring country may fight against an expansion of that agreement to other nations if doing so will hurt its own position. One example of this occurred when Russia threatened to break its trade agreement with Ukraine and place a tariff on Ukrainian goods when the latter sought closer ties with the European Union.

New Industries Can't Develop

Developing industries often benefit from domestic strategies that influence production, such as protective tariffs or tax breaks. As these protections vanish, new industries may find it difficult to establish themselves. It would be hard for an entrepreneur with the goal of succeeding in an industry where cost is a high barrier to entry, for example, to consider launching her product in a particular country if foreign competitors already enjoy economies of scale and easy access to domestic markets.

Tax Troubles

Free trade can hinder the ability of a nation to collect taxes from domestic corporations. A country that allows free trade and the free flow of capital outside of its borders and has a high tax rate may see portable industries migrate elsewhere. While some jobs are hard to move -- a farm, for example, can't easily be relocated overseas -- businesses may find it easier to shift headquarters elsewhere and change accounting methods to record profits in more tax-advantageous areas.