Arguments For and Against Free Trade
Topic: Discuss the arguments for and against free trade in the light of evidence that trade liberalisation may have peaked and may now be rolled back.
Introduction
After decades of liberalization of international trade coupled with strong growth in the openness of economies, international trade dealings have come under heightened scrutiny in the recent past. The public seems to have become dissatisfied with the consequences of trade liberalization. Demonstrators attempted to stop the EU-Canada deal and could disrupt the TTIP with the U.S upon the revival of negotiations (Dullien 2018). The adverse effects of trade with U.S and China, and globalization generally, have been linked with the shift toward populism and Trump’s election. Trade liberalization is a controversial topic; the paper examines arguments in favor of and against free trade, as evidenced by the trade liberalization peak and recent rollback.
Arguments for Free Trade
Trade liberalization can be defined as the reduction or elimination of restrictions on free exchanges of goods between countries, including tariffs, like surcharges and duties plus nontariff barriers, like quotas and license rules. The economists view trade liberalization as a crucial policy towards the promotion of free trade and globalization. First, the proponents of free trade claim that it eventually decreases consumer costs and augments efficiency, which, in turn, promotes greater economic growth (Hendrik & Lewer 2015). The policies that make economies open to trade and investments with other parts of the world are required for sustainable economic growth. This can be evidenced by the fact that no nation in the last few decades has attained economic success, concerning the considerable upturn in living standards, without free trade. For instance, the opening of trade and FDI has been a critical element in East Asia’s economic success since import tariffs declined from 30% to 10% over the last two decades.
The second argument in favor of free trade is the advantages of specialization. Free trade allows nations to specialize in products where they have comparative advantages over trading partners. This leads to the fortification of all benefits of global division of labor, efficient and optimum utilization of scarce resources, and, ultimately, the economy in the total production. Moreover, if nations can specialize in some products, they can also gain from economies of scale and fewer costs, especially in industries with higher fixed costs or investments (Carbaugh 2008). The economies of scale result in lesser prices for consumers as well as higher efficiency for exporting companies and all-round global prosperity. Another argument is that free trade enhances competition of economies owing to the likelihood of stiff foreign competition, and the local producers want to maintain their grounds. The high competition augments efficiency and prevents domestic monopolies; thus, freeing consumers from overexploitation of exorbitant pricing (Case 2020). The final argument is that free trade promotes global stability and peace via political and economic collaborations, which enables all countries to get commodities that it cannot manufacture at all or inefficiently. Therefore, the raw materials and products that are unavailable locally are readily acquired through the free movement at lesser prices.
Arguments against Free Trade
Protectionism is the reverse of trade liberalization and is characterized by harsh barriers as well as market regulation. Unfortunately, in the recent past, there has been a surge in numerous arguments against free trade favoring protectionist policies. The free trade is advantageous for the advanced nations but not backward economies as it has brought sufficient misery to poor and less developed nations (Le et al 2018). Before 1947, India was an example of a colonial dependency of imperialistic power of the United Kingdom, but the principles of free trade eliminated the colonial imperialism. Secondly, critics also claim that free trade leads to the destruction of domestic industries and products. Free trade allows for the importation of goods that are readily available at lower prices; hence, an imbalanced and cut-throat rivalry is developed between foreign and domestic industries. During the process, the local industries can be wiped out as cost cheaper products flood the domestic markets. Besides, another argument is the infiltration of harmful and inferior quality foreign products than the competing local products, which might have gone through rigorous quality checks. Dumping takes place when a nation is holding excessive stock that is then sold below cost on international markets instigating other manufacturers to be unprofitable (Mankiw 2020). For instance, there have been allegations that China is dumping surplus supply of steel on international markets, causing other domestic businesses to be bankrupt. Thus, there is a need to impose trade restrictions on trade to prevent the penetration of harmful goods in the local markets.
Also, the critics propose that one of the consequences of free trade is the danger of overdependence, whereby a nation might experience economic Depression if global trading partners suffer from an economic downturn. For instance, the 1930s Great Depression in the American economy swept across the globe, and all nations suffered severely even when their economies were not caught up in the Depression. The overdependence ensuing from free trade could also become catastrophic in wars. Next, the freeing of trade among nations cannot yield all-around development of the domestic industries. The principle of comparative cost postulates that a nation specializes only in the manufacture of a few products, but the inefficient industries are neglected. Therefore, free trade eliminates the all-rounded development of all industries. Likewise, if the developing nations also have fairly new infant industries, then these industries struggle against global competition under free trade. Still, protection allows the developing industries to fully progress and get experience to compete effectively in the future.
Also, national security could be at stake regarding some local industries like the defense industry needs higher level protection based on safeguarding national security. Furthermore, the unfair treatment of workers concerning forced labor and child labor is a fairly new argument against the importation as it is viewed as highly exploitative. Similarly, the low costs of foreign manufacturing sites often do not meet sound safety and health standards. Finally, it is contended that free trade harms the environment since the least developed countries might exhaust their natural reserves of raw materials for exports. In some cases, the nations with stringent pollution controls could find their consumers importing the goods countries whereby the legislation is slack, and pollution is allowed (Sinha, A., & Mitra 2006). Given these arguments that favor protection as opposed to free trade, the governments are encouraged to impose forms of trade restrictions aimed at safeguarding the national interests.
Conclusion
Overall, there appears to be a developing accord that free trade has not delivered its promise as it has had negative effects on wages and employment. Economists have also toned down their conventional cheering for trade liberalization and began acknowledging that the growth of international trade could have had various adverse effects like the destruction of domestic industries. Global organizations like WTO, IMF, and OECD also acknowledged that, in some cases, there might have undesirable results. Hence, the emphasis on the need for complementary policies aimed at supplementing trade liberalization with added policy measures to ensure that global trade is beneficial for all.
References List
- CARBAUGH, R. J. (2008). Contemporary economics: an applications approach. Armonk, N.Y., M.E. Sharpe.
- CASE, K. E., FAIR, R. C., & OSTER, S. M. (2020). Principles of economics. Boston Pearson.
- DULLIEN S. (2018). Shifting views on trade liberalization: Beyond indiscriminate applause. Intereconomics. 53, 119-124.
- HENDRIK, V. D. B., & LEWER, J. J. (2015). International Trade and Economic Growth. Hoboken, Taylor and Francis.
- LE, M. S., NGUYEN, D.-T., & SINGH, T. (2018). Trade liberalization and poverty: Vietnam now and beyond. Abingdon, Oxfordshire: Routledge.
- Mankiw, N. G. (2020). Essentials of Economics. [S.L.], South-Western.
- SINHA, A., & MITRA, S. (2006). Economic development, climate change, and the environment. London, Routledge.