Is Free trade good?

There is a consensus amongst economists that free trade is mutually beneficial. Yet, the rise of populists and nationalists globally coincides with the growing popularity of protectionism. In 2016, Donald Trump ran a campaign that focused on the US trade deficit, promising to restrict imports from abroad to boost domestic manufacturing. Once in office, the Republican President enacted a series of tariffs on billions of dollars of goods imported from around the world, especially China. This begs the question of whether free trade is beneficial for all countries involved, given its growing resentment. Whilst free trade has contributed to environmental degradation and the decline of certain industries, it has also provided a way out of poverty for many developing nations and has led to much lower prices for consumers.

On one hand, free trade has greatly contributed to the decline in environmental conditions globally over the past decades. This is because nations have an incentive to loosen environmental rules and regulations, to encourage firms to establish businesses in their respective country. As a result, countries with poor environmental standards, such as Australia, are seen as much better places to set up business due to the bigger profit margins that come with looser regulations. These firms can then export goods produced in these cheaper nations, thereby making more profit due to the absence of import tariffs that come with free trade. It is therefore unsurprising that the rise of free trade has coincided with growing greenhouse gas emissions.

At the same time, free trade has led to the decline of many domestic, uncompetitive industries. One such example would be the manufacturing industry in the US; the number of manufacturing jobs has fallen sharply from over 17 million in 2000 to just above 10 million by 2009. This decline followed the introduction of the most comprehensive free trade agreement in US history, NAFTA. The reasons behind the decline of these uncompetitive industries are simple; free trade encourages firms to move their production to places where labour costs are much lower, thereby increasing profits. Whilst free trade has led to a decline in manufacturing in the US, manufacturing output has increased in Germany following their entry into the most comprehensive free trade organisation globally – the Eurozone. This is due to both the low unit labour costs in Germany, alongside their high productivity rates, rendering them a competitive economy for manufacturing. As a result, free trade can prove beneficial or harmful for certain domestic industries, depending on their international competitiveness, with free trade having led to a decline in US manufacturing output, but growth in the German manufacturing industry.

Free trade has been a way of poverty for many developing nations. During the 1950s, East-Asian economies such as Japan and South Korea were amongst some of the poorest globally. However, following the liberalisation of trade barriers, the manufacturing and technology sectors of each nation respectively began to thrive, leading to unbridled economic growth. GNI per capita in North Korea and South Korea were equal in 1952; after the South embraced capitalism and free trade, economic growth skyrocketed, leading to GNI per capita reaching $40,000 by 2016. By comparison, North Korea, a country that hasn’t opened its economy to free trade, has a GNI per capita that remains at levels similar to 1952. Therefore, the effect of free trade on economic growth and prosperity is evident – the remarkable growth of nations such as South Korea has far outpaced that of its neighbour, thanks to free trade.

Finally, free trade is a leading factor in the low inflation rates of the past thirty decades. Firstly, producers can develop economies of scale due to free trade. This is because each country can specialise in producing the good/service that they are best at producing. For example, the UK specialises in financial services. This reduces per unit labour costs as each worker only needs to be trained to do a specific task, with these lower costs being passed on to consumers in the form of lower prices. At the same time, free trade leads to lower prices through increased competition. The removal of trade barriers due to free trade enables foreign firms to enter domestic markets without extra costs. This leads to more competition within a market, forcing firms to make efficiencies and lower prices to remain competitive. Lower prices increase living standards, as consumers have more leftover income to spend on other goods and services.

Ultimately, the positive effects of liberalising trade barriers outweigh the few negative impacts that free trade can have on an economy. Free trade has brought millions of civilians out of extreme poverty, as seen in countries like South Korea and Japan. The negative externalities produced from free trade such as environmental pollution can be resolved through global cooperation and far-reaching agreements. Free trade has also contributed to lower prices for consumers, leading to rising living standards and prosperity. Whilst protectionism may be politically popular, if implemented, tariffs would have detrimental effects on world economies.