Free trade agreements, or FTAs, are deals between two or more countries to lower trade barriers, such as tariffs and import quotas. While trade agreements do make it easier for countries to buy products from each other, they can also cause a host of serious problems.
Free trade agreements make it easier for big businesses to import products from poor countries because lower trade barriers allow them to take advantage of cheap labor costs. The problem is that cheap labor often has a high human cost.
After Jordan signed a free trade agreement with the United States in 2001, for example, sweatshops proliferated in the country, according to a 2006 report from The New York Times. Major American retailers ordered millions of dollars' worth of clothing from Jordan, where manufacturers promised low prices. They kept this promise by allegedly forcing employees to work up to 20 hours a day, often for less than the state-mandated minimum wage. Without the free trade agreement, it's unlikely American retailers would have placed so many orders in Jordan because trade barriers would have made the clothes too expensive.
Free trade deals can cause immense environmental damage by allowing companies to shift their manufacturing facilities to nations with few or no environmental regulations and by increasing access to natural resources in those nations. Before the North American Free Trade Agreement became law in 1993, there was little demand for timber or metal ores from Mexico. In a 2014 report, the Sierra Club asserts that NAFTA stimulated the creation of poorly regulated, highly destructive mining operations in Mexico that would not have existed without the trade agreement.
Loss of Domestic Industry
Free trade agreements often damage a nation's domestic industries by exposing them to competition from foreign producers with lower costs. For example, critics of NAFTA argue it damaged U.S. industries because low labor costs in Mexico allowed Mexican manufacturers to undercut American producers. The Economic Policy Institute argued that by 2010 NAFTA had transferred more than 600,000 American jobs to Mexico. Similarly, the Council on Hemispheric Affairs argues that NAFTA nearly destroyed the Mexican agricultural sector by flooding the country with cheap American crops.
The "Noodle Bowl"
Although proponents of free trade agreements emphasize their ability to improve economic efficiency, some agreements can create complex webs of regulations that actually hurt businesses. The problem is that each bilateral trade deal includes multiple regulations defining products, tax rates, points of origin and other aspects of trade. The dozens of different bilateral deals in the world create legal complexities for buyers and sellers. For example, where does a T-shirt made in Vietnam with cotton grown in the United States come from? Under one agreement, the answer might be Vietnam, while another would call the shirt American. Some economists call these tangled webs or regulations the free trade "noodle bowl" and argue that bilateral agreements do more harm than good.
According to the Global Accounting Alliance, all that added complexity can actually increase transaction costs for businesses, which often have to hire lawyers and accountants to navigate the regulatory environment. The added expenses may give big companies a competitive edge over small businesses, as large firms can handle the larger overhead costs of litigation and compliance.