What Are the Costs of Free Trade?

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What Are the Costs of Free Trade?
What Are the Costs of Free Trade? (Image: Photo: Jorge Vicente, Stock.Xchng)

Free trade is the policy of encouraging manufacturing of products in countries with lower labor and overhead costs for export to areas with higher labor and overhead costs without import limiting mechanisms like import duties and tariffs. In theory, and often in practice, free trade results in lower direct costs, and thus lower prices for manufactured products. Free trade is promoted through the World Trade Organization (WTO) and North American Free Trade Agreement (NAFTA) agreements. Although products produced under free-trade agreements have lower direct costs, free trade has some indirect costs.

Job Losses in Major Importing Countries

Free trade results in manufacturing and engineering job losses in nations with higher labor and production costs. The Economic Policy Institute reports that 879,280 jobs manufacturing jobs were transferred from the United States to Mexico since the implementation of NAFTA in 1993. Most of the jobs transferred were high-wage manufacturing jobs, resulting in greater income inequality in the United States economy. Proponents of free trade argue that lost jobs and wages are offset by job retraining and increased purchasing power of lower- and middle-class consumers because of lower prices.

Displacements in Major Manufacturing Countries

The transfer of jobs to lower wage- and production-cost countries often results in major social and economic displacements in the manufacturing country. Displacements occur as large sectors of land are reserved for the production of exports for wealthier markets and as people leave traditional agriculture and local industry to work in export-related industries. Free trade also displaces large groups of people through immigration, emigration and guest-worker programs. The majority of foreign cash remissions in many nations, like the Philippines and Vietnam, are from workers taking jobs in manufacturing nations like Taiwan, China, South Korea and Japan. This creates problems ranging from exploitation to human trafficking. Although displacement is in many ways negative, U.N. Secretary General Ban Ki-moon cites several positive aspects of free trade, including more rapid industrial and economic development in some exporting nations.

Environmental Degradation in Major Manufacturing Countries

Moving manufacturing to nations with lax environmental regulation results in destruction and devastation of natural systems in the manufacturing nations. In a study by Judith M. Dean of the U.S. International Trade Commission and Mary E. Lovely of Syracuse University's Maxwell School of Citizenship and Public Affairs, sulphur dioxide (SO2) pollution, the main component of acid rain, and water pollution have increased in China in direct proportion to increases in exports resulting from free trade. Carmen C. Gozalez of the Seattle University School of Law cites numerous cases of the shifting of environmental degradation due to manufacturing from wealthier countries to the developing world. However, many importing nations are becoming more aware of the environmental problems in exporting nations and are pressuring governments and manufacturers toward more responsible industrial practices.

Loss of Production Capabilities in Major Importing Countries

By moving manufacturing and production to lower-cost nations, many previously industrialized nations are losing the capability to manufacture certain types of products. Paul Craig Roberts, author of "Supply Side Revolution: An Insider's Account of Policymaking in Washington," notes the advantages in lower prices and corporate profits of free trade at the cost of losses in occupations, production knowledge and capabilities, and lower Gross Domestic Product (GDP) in importing nations. Proponents of free trade argue that the loss of manufacturing capabilities is offset by lower prices on consumable products and growth in other areas of the economy, such as knowledge-based industries.

Human Trafficking

Increases in free trade have resulted in increased human trafficking. Although human trafficking often involves trafficking in women for sexual purposes, there is are major problems with trafficking of people for work in industrial settings. In many cases, victims will pay a high fee for placement in a job in a manufacturing nation only to arrive at the job to discover they will either not be paid as agreed or placed in high-risk jobs using defective equipment that local labor refuses to operate. Proponents of guest-worker programs cite lower labor costs and economic benefits in various nations of origin as positive contributions of various national guest-worker programs.

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