Free Trade is an important consideration for anyone in the global trading environment and with Brexit and the USMCA top of mind, the focus is again on the importance of trading terms. But what are the real pros and cons?
“Unfair trade is perhaps the single biggest reason that I decided to run for president,” President Trump said in his state of the union address, when talking about the introduction of the United States-Mexico-Canada Agreement (USMCA) that updates and changes the 25-year-old North American Free Trade Agreement.
Hot on the heels of the signing of the USMCA, Britain took its first steps outside the EU with crucial free trade negotiations. The BBC reports that the two sides agree on the need for a free-trade agreement “with no tariffs (border taxes on goods) or quotas (limits on the amount of goods). They are also keen to include as much of the service sector as possible.”
Recently I listened to the CEO of Wine Australia, Andreas Clark, talking about the achievements of the Australian wine industry in China. According to him, much of their success can be attributed to the free trade agreement between these two countries. South African wine exporters often complain about the lack of free trade agreements with our BRICS partner as we have seen the benefit from the favourable trading terms with the EU. But other than lowering the barriers to trade and increasing business between countries, what are the real pros and cons of such agreements?
- Economic growth.
- Focusing on comparative advantage and playing to your strengths.
- A dynamic business environment and a more competitive climate.
- Better quality goods as a result of local businesses being exposed to global trade.
- Foreign Direct Investment – key in boosting local industry and creating job opportunities.
- Access to global expertise, technology know-how, resource development and best practice.
- Less global conflict by encouraging countries to rely on each other for resources.
- Less local government spending in the form of subsidies might be required.
- Not all imports are consumer goods, others feed and diversify the supply chain for local producers.
- Job losses. While FDI might create jobs, reduced tariffs might also make local production less competitive and encourage imports of low costs products from other countries, resulting in lower rates of employment.
- Developing countries might be exposed when it comes to a lack of:
- labour legislation resulting in the exploitation of the work force.
- intellectual property right laws to protect patents and inventions.
- environmental protection leading to among others, deforestation and strip-mining.
- Urbanisation can happen when traditional and farming economies can’t compete with subsidized business. They have to compete for jobs without being qualified, resulting in unemployment, crime and poverty.
- Both urbanisation and development might result in the destruction of native cultures.
- Smaller countries might suffer revenue loss from import fees and tariffs.
- Possible currency manipulation will be to the disadvantage of one of the trading countries.
Free trade agreements are designed to increase trade between two or more countries. Increased international trade has the following six main advantages:
- Increased Economic Growth: The U.S. International Trade Commission estimated that NAFTA could increase U.S. economic growth by 0.5% a year.2
- More Dynamic Business Climate: Often, businesses were protected before the agreement. These local industries risked becoming stagnant and non-competitive on the global market. With the protection removed, they have the motivation to become true global competitors.
- Lower Government Spending: Many governments subsidize local industry segments. After the trade agreement removes subsidies, those funds can be put to better use.3
- Foreign Direct Investment: Investors will flock to the country. This adds capital to expand local industries and boost domestic businesses. It also brings in U.S. dollars to many formerly isolated countries.4
- Expertise: Global companies have more expertise than domestic companies to develop local resources. That’s especially true in mining, oil drilling, and manufacturing. Free trade agreements allow global firms access to these business opportunities. When the multinationals partner with local firms to develop the resources, they train them on the best practices. That gives local firms access to these new methods.5
- Technology Transfer: Local companies also receive access to the latest technologies from their multinational partners. As local economies grow, so do job opportunities. Multi-national companies provide job training to local employees.6
The biggest criticism of free trade agreements is that they are responsible for job outsourcing. There are seven total disadvantages:
- Increased Job Outsourcing: Why does that happen? Reducing tariffs on imports allows companies to expand to other countries. Without tariffs, imports from countries with a low cost of living cost less. It makes it difficult for U.S. companies in those same industries to compete, so they may reduce their workforce. Many U.S. manufacturing industries did, in fact, lay off workers as a result of NAFTA. One of the biggest criticisms of NAFTA is that it sent jobs to Mexico.7
- Theft of Intellectual Property: Many developing countries don’t have laws to protect patents, inventions, and new processes. The laws they do have aren’t always strictly enforced. As a result, corporations often have their ideas stolen. They must then compete with lower-priced domestic knock-offs.8
- Crowd out Domestic Industries: Many emerging markets are traditional economies that rely on farming for most employment. These small family farms can’t compete with subsidized agri-businesses in the developed countries. As a result, they lose their farms and must look for work in the cities. This aggravates unemployment, crime, and poverty.9
- Poor Working Conditions: Multi-national companies may outsource jobs to emerging market countries without adequate labor protections. As a result, women and children are often subjected to grueling factory jobs in sub-standard conditions.10
- Degradation of Natural Resources: Emerging market countries often don’t have many environmental protections. Free trade leads to depletion of timber, minerals, and other natural resources. Deforestation and strip-mining reduce their jungles and fields to wastelands.11
- Destruction of Native Cultures: As development moves into isolated areas, indigenous cultures can be destroyed. Local peoples are uprooted. Many suffer disease and death when their resources are polluted.12
- Reduced Tax Revenue: Many smaller countries struggle to replace revenue lost from import tariffs and fee